Edgar Filing: Public Storage

ps10q_1q10.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission File Number: 001-33519

PUBLIC STORAGE

(Exact name of registrant as specified in its charter)

Maryland	95-3551121
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

701 Western Avenue, Glendale, California	91201-2349
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (818) 244-8080.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.

[X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer [X] Accelerated Filer [ ] Non-accelerated Filer [ ]

Smaller Reporting Company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[ ] Yes [X] No

Indicate the number of the registrant’s outstanding common shares of beneficial interest, as of May 5, 2010:

Common Shares of beneficial interest, $.10 par value per share – 169,833,053 shares

PUBLIC STORAGE

INDEX


PART I	FINANCIAL INFORMATION	Pages

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009	1

	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009	2

	Condensed Consolidated Statement of Equity for the Three Months Ended March 31, 2010	3

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009	4 - 5

	Notes to Condensed Consolidated Financial Statements	6 - 28

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29 - 53

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54

Item 4.	Controls and Procedures	55

PART II	OTHER INFORMATION (Items 3, 4 and 5 are not applicable)

Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	56 - 64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 6.	Exhibits	64

PUBLIC STORAGE

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

	March 31, 2010			December 31, 2009
	(Unaudited)
ASSETS

Cash and cash equivalents	$	719,982		$	763,789
Marketable securities		95,191			-
Real estate facilities, at cost:
Land		2,717,117			2,717,368
Buildings		7,578,733			7,575,587
		10,295,850			10,292,955
Accumulated depreciation		(2,816,692	)		(2,734,449	)
		7,479,158			7,558,506
Construction in process		8,381			3,527
		7,487,539			7,562,033

Investment in real estate entities		601,104			612,316
Goodwill, net		174,634			174,634
Intangible assets, net		37,364			38,270
Loan receivable from Shurgard Europe		527,243			561,703
Other assets		101,414			92,900
Total assets	$	9,744,471		$	9,805,645

LIABILITIES AND EQUITY

Notes payable	$	516,132		$	518,889
Equity Shares, Series A called for redemption (Note 7)		205,366			-
Accrued and other liabilities		201,416			212,253
Total liabilities		922,914			731,142

Redeemable noncontrolling interests in subsidiaries (Note 6)		13,106			13,122

Commitments and contingencies (Note 11)
Equity:
Public Storage shareholders’ equity:
Cumulative Preferred Shares of beneficial interest, $0.01 par value, 100,000,000 shares authorized, 886,140 shares issued (in series) and outstanding, (886,140 at December 31, 2009) at liquidation preference		3,399,777			3,399,777
Common Shares of beneficial interest, $0.10 par value, 650,000,000 shares authorized, 168,657,595 shares issued and outstanding (168,405,539 at December 31, 2009)		16,867			16,842
Equity Shares of beneficial interest, Series A, $0.01 par value, 100,000,000 shares authorized, none outstanding (8,377.193 shares issued and outstanding at December 31, 2009) (Note 7)		-			-
Paid-in capital		5,487,156			5,680,549
Accumulated deficit		(202,998	)		(153,759	)
Accumulated other comprehensive loss		(24,779	)		(15,002	)
Total Public Storage shareholders’ equity		8,676,023			8,928,407
Equity of permanent noncontrolling interests in subsidiaries (Note 6)		132,428			132,974
Total equity		8,808,451			9,061,381
Total liabilities and equity	$	9,744,471		$	9,805,645

See accompanying notes.

PUBLIC STORAGE

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2010			2009

Revenues:
Self-storage facilities	$	364,682		$	370,772
Ancillary operations		25,158			25,835
Interest and other income		8,216			7,633
		398,056			404,240
Expenses:
Cost of operations:
Self-storage facilities		132,684			133,265
Ancillary operations		8,430			9,653
Depreciation and amortization		84,828			84,492
General and administrative		10,077			9,679
Interest expense		7,339			8,128
		243,358			245,217
Income from continuing operations before equity in earnings of real estate entities, gains on disposition of real estate investments, gain on early retirement of debt, asset impairment charges and foreign currency exchange loss		154,698			159,023
Equity in earnings of real estate entities		9,961			22,811
Gains on disposition of real estate investments		333			2,722
Gain on early retirement of debt		-			4,114
Asset impairment charges		(1,008	)		-
Foreign currency exchange loss		(34,843	)		(34,733	)
Income from continuing operations		129,141			153,937
Discontinued operations		776			(508	)
Net income		129,917			153,429
Net income allocated (to) from noncontrolling interests in subsidiaries:
Based upon income of the subsidiaries		(5,956	)		(8,427	)
Based upon repurchases of preferred partnership units		-			72,000
Net income allocable to Public Storage shareholders	$	123,961		$	217,002
Allocation of net income to (from) Public Storage shareholders:
Preferred shareholders based on distributions paid	$	58,108		$	58,108
Preferred shareholders based on repurchases		-			(6,218	)
Equity Shares, Series A		5,131			5,131
Equity Shares, Series A based on redemptions		25,746			-
Restricted share units		238			486
Common shareholders		34,738			159,495
	$	123,961		$	217,002
Net income per common share – basic and diluted
Continuing operations	$	0.21		$	0.95
Discontinued operations		-			-
	$	0.21		$	0.95
Basic weighted average common shares outstanding		168,477			168,312
Diluted weighted average common shares outstanding		169,310			168,473
Equity Shares, Series A (basic and diluted):
Net income per share	$	0.61		$	0.61
Weighted average depositary shares		8,377			8,377

See accompanying notes.

PUBLIC STORAGE

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Amounts in thousands, except share data)

(Unaudited)

	Cumulative Preferred Shares		Common Shares		Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Public Storage Shareholders’ Equity			Equity of Permanent Noncontrolling Interests In Subsidiaries			Total Equity
Balance at December 31, 2009	$	3,399,777	$	16,842	$	5,680,549		$	(153,759	)	$	(15,002	)	$	8,928,407		$	132,974		$	9,061,381
Equity Shares, Series A called for redemption (8,377.193 shares) (Note 7)		-		-		(205,366	)		-			-			(205,366	)		-			(205,366	)
Issuance of common shares in connection with share-based compensation (252,056 shares) (Note 9)		-		25		11,797			-			-			11,822			-			11,822
Share-based compensation expense, net of cash compensation in lieu of common shares (Note 9)		-		-		176			-			-			176			-			176
Adjustments of redeemable noncontrolling interests in subsidiaries to liquidation value (Note 6)		-		-		-			(65	)		-			(65	)		-			(65	)
Net income		-		-		-			129,917			-			129,917			-			129,917
Net income allocated to (Note 6):
Redeemable noncontrolling interests in subsidiaries		-		-		-			(223	)		-			(223	)		-			(223	)
Permanent noncontrolling equity interests		-		-		-			(5,733	)		-			(5,733	)		5,733			-
Distributions to equity holders:
Cumulative preferred shares (Note 7)		-		-		-			(58,108	)		-			(58,108	)		-			(58,108	)
Permanent noncontrolling interests in subsidiaries		-		-		-			-			-			-			(6,279	)		(6,279	)
Equity Shares, Series A ($0.6125 per depositary share)		-		-		-			(5,131	)		-			(5,131	)		-			(5,131	)
Holders of unvested restricted share units		-		-		-			(357	)		-			(357	)		-			(357	)
Common shares ($0.65 per share)		-		-		-			(109,539	)		-			(109,539	)		-			(109,539	)
Other comprehensive loss (Note 2)		-		-		-			-			(9,777	)		(9,777	)		-			(9,777	)

Balance at March 31, 2010	$	3,399,777	$	16,867	$	5,487,156		$	(202,998	)	$	(24,779	)	$	8,676,023		$	132,428		$	8,808,451

See accompanying notes.

PUBLIC STORAGE

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net income	$	129,917		$	153,429
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposition of real estate investments, including amounts in discontinued operations		(770	)		(2,722	)
Gain on early retirement of debt		-			(4,114	)
Asset impairment charges		1,008			-
Depreciation and amortization, including amounts in discontinued operations		84,886			85,200
Distributions received from real estate entities in excess of (less than) equity in earnings of real estate entities		2,745			(10,992	)
Foreign currency exchange loss		34,843			34,733
Other		(19,507	)		4,331
Total adjustments		103,205			106,436
Net cash provided by operating activities		233,122			259,865
Cash flows from investing activities:
Capital improvements to real estate facilities		(4,812	)		(8,499	)
Construction in process		(4,854	)		(2,328	)
Proceeds from sales of other real estate investments		932			10,261
Purchases of marketable securities		(95,248	)		-
Other investing activities		(2,221	)		(825	)
Net cash used in investing activities		(106,203	)		(1,391	)
Cash flows from financing activities:
Principal payments on notes payable		(1,965	)		(1,890	)
Redemption of senior unsecured notes payable		-			(109,622	)
Net proceeds from the issuance of common shares		11,822			555
Repurchases of cumulative preferred shares		-			(17,535	)
Repurchases of permanent noncontrolling equity interests		-			(153,000	)
Distributions paid to Public Storage shareholders		(173,135	)		(156,162	)
Distributions paid to redeemable noncontrolling interests		(304	)		(340	)
Distributions paid to permanent noncontrolling equity interests		(6,279	)		(8,075	)
Net cash used in financing activities		(169,861	)		(446,069	)
Net decrease in cash and cash equivalents		(42,942	)		(187,595	)
Net effect of foreign exchange translation on cash		(865	)		294
Cash and cash equivalents at the beginning of the period		763,789			680,701
Cash and cash equivalents at the end of the period	$	719,982		$	493,400

See accompanying notes.

PUBLIC STORAGE

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

(Continued)

	For the Three Months Ended March 31,
	2010			2009
Supplemental schedule of non cash investing and financing activities:

Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation	$	828		$	-
Investment in real estate entities		8,467			10,366
Loan receivable from Shurgard Europe		34,460			34,864
Accumulated other comprehensive loss		(44,620	)		(44,936	)

Adjustments of redeemable noncontrolling interests to fair values:
Accumulated deficit		(65	)		(99	)
Redeemable noncontrolling interests		65			99

Equity Shares, Series A called for redemption:
Paid-in capital		(205,366	)		-
Equity Shares, Series A called for redemption		205,366			-

See accompanying notes.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

1.	Description of the Business

Public Storage (referred to herein as “the Company”, “the Trust”, “we”, “us”, or “our”), a Maryland real estate investment trust, was organized in 1980. Our principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use. Our self-storage facilities are located primarily in the United States (“U.S.”). We also have interests in self-storage facilities located in seven Western European countries.

At March 31, 2010, we had direct and indirect equity interests in 2,009 self-storage facilities located in 38 states operating under the “Public Storage” name and own one facility in London, England. We also have a 49% interest in Shurgard Europe, which owns 115 facilities directly and has a 20% interest in 72 self-storage facilities located in Europe which operate under the “Shurgard Storage Centers” name. We own one facility located in London, England also operated under the Shurgard Storage Centers name. We also have direct and indirect equity interests in approximately 22 million net rentable square feet of commercial space located in 11 states in the U.S. primarily operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name.

Any reference to the number of properties, square footage, number of tenant reinsurance policies outstanding and the aggregate coverage of such reinsurance policies are unaudited and outside the scope of our independent registered public accounting firm’s review and audit of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board.

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as defined in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification”), including the related guidance with respect to interim financial information, and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 due to seasonality and other factors. The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Certain amounts previously reported in our December 31, 2009 and March 31, 2009 financial statements have been reclassified to conform to the March 31, 2010 presentation, as a result of discontinued operations.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Consolidation Policy

Codification Section 810-10-15-14 stipulates that generally any entity with a) insufficient equity to finance its activities without additional subordinated financial support provided by any parties, or b) equity holders that, as a group, lack the characteristics specified in the Codification which evidence a controlling financial interest, is considered a Variable Interest Entity (“VIE”). We have determined that we have no interests in VIEs.

When we are the general partner, we are presumed to control the partnership unless the limited partners possess either a) the substantive ability to dissolve the partnership or otherwise remove us as general partner without cause (commonly referred to as “kick-out rights”), or b) the right to participate in substantive operating and financial decisions of the limited partnership that are expected to be made in the course of the partnership’s business.

The accounts of the entities we control are included in our consolidated financial statements, and all intercompany balances and transactions are eliminated. We account for our investment in entities that we do not consolidate using the equity method of accounting or, if we do not have the ability to exercise significant influence over an investee, the cost method of accounting. Changes in consolidation status are reflected effective the date the change of control or determination of primary beneficiary status occurred, and previously reported periods are not restated. The entities that we consolidate, for the periods in which the reference applies, are referred to hereinafter as the “Subsidiaries.” The entities that we have an interest in but do not consolidate, for the periods in which the reference applies, are referred to hereinafter as the “Unconsolidated Entities.”

Collectively, at March 31, 2010, the Company and the Subsidiaries own a total of 1,997 real estate facilities included in continuing operations, consisting of 1,988 self-storage facilities in the U.S., one self-storage facility in London, England and eight commercial facilities in the U.S. Two facilities owned by the Company are subject to condemnation proceedings and their operating results are classified as discontinued operations for all periods presented.

At March 31, 2010, the Unconsolidated Entities are comprised of PSB, Shurgard Europe, and various limited and joint venture partnerships (the partnerships referred to as the “Other Investments”). At March 31, 2010, PSB owns approximately 19.8 million rentable square feet of commercial space, Shurgard Europe has interests in 187 self-storage facilities in Europe with 10.1 million net rentable square feet, and the Other Investments own in aggregate 19 self-storage facilities with 1.1 million net rentable square feet in the U.S.

Use of Estimates

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

Income Taxes

For all taxable years subsequent to 1980, the Company has qualified and intends to continue to qualify as a real estate investment trust (“REIT”), as defined in Section 856 of the Internal Revenue Code. As a REIT, we do not incur federal or significant state tax on that portion of our taxable income which is distributed to our shareholders, provided that we meet certain tests. We believe we have met these tests during 2009 and we expect to meet these tests during 2010 and, accordingly, no provision for federal income taxes has been made in the accompanying condensed consolidated financial statements on income produced and distributed on real estate rental operations. We have business operations in taxable REIT subsidiaries that are subject to regular corporate tax on their taxable income, and such corporate taxes attributable to these operations are presented in ancillary cost of operations in our accompanying condensed consolidated statements of income. We also are subject to certain state taxes, which are presented in general and administrative expense in our accompanying condensed consolidated statements of income. We have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements with respect to all tax periods which remain subject to examination by major tax jurisdictions as of March 31, 2010.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Real Estate Facilities

Real estate facilities are recorded at cost. Costs associated with the acquisition, development, construction, renovation and improvement of properties are capitalized. Internal and external transaction costs, such as legal and due diligence costs, that are incurred in connection with the acquisition of real estate facilities are expensed as incurred. Interest, property taxes and other costs associated with development incurred during the construction period are capitalized as building cost. Costs associated with the sale of real estate facilities or interests in real estate investments are expensed as incurred. The purchase cost of existing self-storage facilities that we acquire are allocated based upon relative fair value of the land, building and tenant intangible components of the real estate facility. Expenditures for repairs and maintenance are expensed when incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which generally range from 5 to 25 years.

Other Assets

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

Accrued and Other Liabilities

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

Financial Instruments

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

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

Marketable securities represent corporate debt securities rated A1 by Standard and Poor’s. Because we have the positive intent and ability to hold these securities to maturity, the securities are stated at amortized cost, the related unrecognized gains and losses are excluded from earnings and other comprehensive income. The difference between interest income that is imputed using the effective interest method and the actual note interest collected is recorded as an adjustment to the marketable security balance; marketable securities were decreased $57,000 during the three months ended March 31, 2010 in applying the effective interest method. The amortized cost, gross unrecognized holding losses, and fair value of our marketable securities were $95,191,000, ($163,000) and $95,028,000, respectively, at March 31, 2010. The characteristics of the marketable securities and comparative metrics utilized in our evaluation represent significant observable inputs, which are “Level 2” inputs as the term is utilized in FASB Codification Section 820-10-35-47. All of our marketable securities have a maturity of one year or less as of March 31, 2010. We periodically assess our marketable securities for other-than-temporary impairment. Any such other-than-temporary impairment from credit loss is recognized as a realized loss and measured as the excess of carrying value over fair value at the time the assessment is made. During the three months ended March 31, 2010, we had no other-than-temporary impairment losses.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

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

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, marketable securities, accounts receivable, the loan receivable from Shurgard Europe, and restricted cash, which is included in other assets. Cash and cash equivalents and restricted cash, as described above, including commercial paper, are only invested in instruments with an investment grade rating. See “Loan Receivable from Shurgard Europe” below for information regarding our fair value measurement of this instrument.

At March 31, 2010, due primarily to our investment in and loan receivable from Shurgard Europe, our operations and our financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar.

We estimate the fair value of our notes payable to be $542,507,000 at March 31, 2010, based primarily upon discounting the future cash flows under each respective note at an interest rate that approximates loans with similar credit quality and term to maturity. The characteristics of the notes payable and comparative metrics utilized in our evaluation represent significant observable inputs, which are “Level 2” inputs as the term is utilized in FASB Codification Section 820-10-35-47.

Goodwill

Goodwill represents the excess of acquisition cost over the fair value of net tangible and identifiable intangible assets acquired in business combinations, and has an indeterminate life. Each business combination from which our goodwill arose was for the acquisition of single businesses and accordingly, the allocation of our goodwill to our business segments is based directly on such acquisitions. Our goodwill balance of $174,634,000 is reported net of accumulated amortization of $85,085,000 as of March 31, 2010 and December 31, 2009.

Intangible Assets

We acquire finite-lived intangible assets representing primarily the estimated value of the tenants in place (a “Tenant Intangible”) at the date of the acquisition of each respective facility. Tenant Intangibles are amortized relative to the benefit of the tenants in place to each period. Accumulated amortization reflects those properties where the related Tenant Intangibles had not been fully amortized at each applicable date.

At March 31, 2010, our Tenant Intangibles have a net book value of $18,540,000 ($19,446,000 at December 31, 2009). Accumulated amortization totaled $12,524,000 at March 31, 2010 ($14,688,000 at December 31, 2009), and amortization expense of $906,000 and $2,257,000 was recorded for the three months ended March 31, 2010 and 2009, respectively.

We also have an intangible asset representing the value of the “Shurgard” trade name, which is used by Shurgard Europe pursuant to a licensing agreement, with a book value of $18,824,000 at March 31, 2010 and December 31, 2009. The Shurgard trade name has an indefinite life and, accordingly, we do not amortize this asset but instead analyze it on an annual basis for impairment. No impairments have been noted from any of our annual evaluations, and we did not identify any indicators of impairment at March 31, 2010.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Evaluation of Asset Impairment

We evaluate our real estate, intangibles, the Shurgard tradename, and other long-lived assets for impairment on a quarterly basis. We first evaluate these assets for indicators of impairment, and if any indicators of impairment are noted, we determine whether the carrying value of such assets is in excess of the future estimated undiscounted cash flows attributable to these assets. If there is excess carrying value over such future undiscounted cash flows, an impairment charge is recorded for the excess of carrying value over the assets’ estimated fair value. Any long-lived assets which we expect to sell or otherwise dispose of prior to their estimated useful life are stated at the lower of their estimated net realizable value (estimated fair value less cost to sell) or their carrying value. During the three months ended March 31, 2010, we recorded an impairment charge totaling $1,008,000, comprised of $611,000 in other assets and $397,000 in real estate facilities (Note 3). No additional impairments were identified from our evaluations in any periods presented in the accompanying condensed consolidated financial statements, except as noted above.

We evaluate impairment of goodwill annually by comparing the aggregate book value (including goodwill) of each reporting unit to their respective estimated fair value. No impairment of our goodwill was identified in our annual evaluation at December 31, 2009, nor were there any indicators of impairment at March 31, 2010.

Revenue and Expense Recognition

Rental income, which is generally earned pursuant to month-to-month leases for storage space, as well as late charges and administrative fees, are recognized as earned. Promotional discounts are recognized as a reduction to rental income over the promotional period, which is generally during the first month of occupancy. Ancillary revenues and interest and other income are recognized when earned. Equity in earnings of real estate entities is recognized based on our ownership interest in the earnings of each of the Unconsolidated Entities.

We accrue for property tax expense based upon actual amounts billed for the related time periods and, in some circumstances due to taxing authority assessment and billing timing and disputes of assessed amounts, estimates and historical trends. If these estimates are incorrect, the timing and amount of expense recognition could be affected. Cost of operations, general and administrative expense, interest expense, as well as television, yellow page, and other advertising expenditures are expensed as incurred.

Foreign Currency Exchange Translation

The local currency is the functional currency for the foreign operations we have an interest in. Assets and liabilities included on our consolidated balance sheets, including our equity investment in, and our loan receivable from, Shurgard Europe, are translated at end-of-period exchange rates, while revenues, expenses, and equity in earnings in the related real estate entities, are translated at the average exchange rates in effect during the period. The Euro, which represents the functional currency used by a majority of the foreign operations for which we have an interest, was translated at an end-of-period exchange rate of approximately 1.345 U.S. Dollars per Euro at March 31, 2010 (1.433 at December 31, 2009), and average exchange rates of 1.384 and 1.306 for the three months ended March 31, 2010 and 2009, respectively. Equity is translated at historical rates and the resulting cumulative translation adjustments, to the extent not included in net income, are included as a component of accumulated other comprehensive income (loss) until the translation adjustments are realized. See “Other Comprehensive Income” below for further information regarding our foreign currency translation gains and losses.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Fair Value Accounting

As the term is used in our financial statements, “fair value” is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We prioritize the inputs used in measuring fair value based upon a three-tier fair value hierarchy described in the FASB Codification Section 820-10-35-52. See “Loan Receivable from Shurgard Europe” below and “Financial Instruments” above, as well as “Redeemable Noncontrolling Interests in Subsidiaries” and “Other Permanent Noncontrolling Interests in Subsidiaries” in Note 6 for information regarding our fair value measurements.

Loan Receivable from Shurgard Europe

As of March 31, 2010, we had a €391.9 million loan receivable from Shurgard Europe totaling $527,243,000 ($561,703,000 at December 31, 2009). The loan, as amended, bears interest at a fixed rate of 9.0% per annum and matures March 31, 2013. Prior to being amended on October 31, 2009, the loan bore interest at a fixed rate of 7.5% per annum and matured on March 31, 2010. All other material terms and conditions remained the same after the amendment.

The loan is denominated in Euros and is translated to U.S. Dollars for financial statement purposes. During each applicable period, because we have expected repayment of the loan within two years of each respective balance sheet date, we have recognized foreign exchange rate gains or losses in income as a result of changes in exchange rates between the Euro and the U.S. Dollar.

For the three months ended March 31, 2010 and 2009, we recorded interest income of approximately $6,430,000 and $5,177,000, respectively, related to the loan. These amounts reflect 51% of the aggregate interest on the loans, with the other 49%, reflecting our ownership interest in Shurgard Europe, classified as equity in earnings of real estate entities. Loan fees collected from Shurgard Europe are amortized on a straight-line basis as interest income over the applicable term to which the fee applies.

Although there can be no assurance, we believe that Shurgard Europe has sufficient liquidity and collateral, and we have sufficient creditor rights, such that credit risk is minimal. In addition, we believe the interest rate on the loan approximates the market rate for loans with similar credit characteristics and tenor, and that the carrying value of the loan approximates fair value. The characteristics of the loan and comparative metrics utilized in our evaluation represent significant unobservable inputs, which are “Level 3” inputs as the term is utilized in FASB Codification Section 820-10-35-52.

Our commitment to provide additional loans, up to €185 million ($265.2 million at December 31, 2009) to Shurgard Europe to assist in financing an acquisition of its joint venture partners’ interest in affiliated two joint ventures expired on March 31, 2010 without being drawn.

Other Comprehensive Income

Other comprehensive income consists of foreign currency translation adjustments and unrealized holding gains or losses on our marketable securities that are not already recognized in our net income. Other comprehensive income is reflected as an adjustment to “Accumulated Other Comprehensive Income” in the equity section of our condensed consolidated balance sheet, and is added to our net income in determining total comprehensive income for the period as reflected in the following table:

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

	For the Three Months Ended March 31,
	2010			2009
	(Amounts in thousands)
Net income	$	129,917		$	153,429
Other comprehensive income (loss):
Aggregate foreign currency translation adjustments for the period		(44,620	)		(44,936	)
Less: foreign currency translation adjustments reflected in net income as “Foreign currency loss”		34,843			34,733
Other comprehensive loss for the period		(9,777	)		(10,203	)
Total comprehensive income	$	120,140		$	143,226

Discontinued Operations

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

Included in discontinued operations are two facilities we currently own that are subject to eminent domain proceedings, our truck rental and containerized storage operations which ceased in 2009, and certain other self-storage facilities that were disposed of in 2009. In addition to revenues and expenses of these operating units prior to disposal, discontinued operations includes $437,000 and $4,335,000 in gains on disposition of real estate facilities for the three months ended March 31, 2010 and 2009, respectively, as well as $3,500,000 in truck disposal expenses in the three months ended March 31, 2009.

Net Income per Common Share

We first allocate net income to our noncontrolling interests in subsidiaries (Note 6) and preferred shareholders to arrive at net income allocable to our common shareholders and Equity Shares, Series A. Net income allocated to preferred shareholders or noncontrolling interests in subsidiaries includes any excess of the cash required to redeem any preferred securities in the period over the net proceeds from the original issuance of the securities (or, if securities are redeemed for less than the original issuance proceeds, income allocated to the holders of the redeemed securities is reduced).

The remaining net income is allocated among our regular common shares, restricted share units, and our Equity Shares, Series A based upon the dividends declared (or accumulated) for each security in the period, combined with each security’s participation rights in undistributed earnings. Net income allocated to the Equity Shares, Series A for the three months ended March 31, 2010 also includes $25.7 million, representing the excess of cash paid to redeem the securities over the original issuance proceeds. We called these securities for redemption during the three months ended March 31, 2010, and redeemed them on April 15, 2010.

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

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Basic net income per share, basic net income (loss) from discontinued operations per share, and basic net income from continuing operations per share are computed using the weighted average common shares outstanding. Diluted net income per share, diluted net income (loss) from discontinued operations per share, and diluted net income from continuing operations per share are computed using the weighted average common shares outstanding, adjusted for the impact, if dilutive, of stock options outstanding (Note 9).

The following table reflects the components of the calculations of our basic and diluted net income per share, basic and diluted net loss from discontinued operations per share, and basic and diluted net income from continuing operations per share which are not already otherwise set forth on the face of our condensed consolidated statements of income:

	For the Three Months Ended March 31,
	2010			2009
	(Amounts in thousands)

Net income allocable to common shareholders from continuing operations and discontinued operations:

Net income allocable to common shareholders	$	34,738		$	159,495
Eliminate: Discontinued operations allocable to common shareholders		(776	)		508
Net income from continuing operations allocable to common shareholders	$	33,962		$	160,003

Weighted average common shares and equivalents outstanding:
Basic weighted average common shares outstanding		168,477			168,312
Net effect of dilutive stock options - based on treasury stock method using average market price		833			161
Diluted weighted average common shares outstanding		169,310			168,473

Recent Accounting Pronouncements and Guidance

In June 2009, the FASB issued accounting pronouncements which became effective January 1, 2010 and require restatement of previously reported financial statements on the new accounting basis. One pronouncement affects accounting for Variable Interest Entities, by (i) eliminating the concept of a qualifying special purpose entity, (ii) replacing the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity, and (iii) providing for additional disclosures about an entity’s involvement with a variable interest entity. Another pronouncement affects the accounting for transfers of financial assets, by (i) eliminating the concept of a qualifying special purpose entity, (ii) amending the derecognition criteria for a transfer to be accounted for as a sale, and (iii) requiring additional disclosure over transfers accounted for as a sale. These pronouncements did not have an effect on our financial statements.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

3.	Real Estate Facilities

Activity in real estate facilities is as follows:

	Three Months Ended March 31, 2010
	(Amounts in thousands)
Operating facilities, at cost:
Beginning balance	$	10,292,955
Capital improvements		4,812
Disposition of real estate facilities		(311	)
Impairment of real estate facilities		(397	)
Impact of foreign exchange rate changes		(1,209	)
Ending balance		10,295,850
Accumulated depreciation:
Beginning balance		(2,734,449	)
Depreciation expense		(82,773	)
Disposition of real estate facilities		149
Impact of foreign exchange rate changes		381
Ending balance		(2,816,692	)
Construction in process:
Beginning balance		3,527
Current development		4,854
Ending balance		8,381
Total real estate facilities at March 31, 2010	$	7,487,539

During the three months ended March 31, 2010, we recorded an impairment charge totaling $397,000 related to a land-leased facility where the lease is expiring and we do not expect the lease to be renewed. This impairment charge is included in “asset impairment charges” on our condensed consolidated statement of income for the three months ended March 31, 2010. During the three months ended March 31, 2010, we disposed of a portion of certain real estate facilities in connection with condemnation proceedings, with net proceeds totaling $495,000, and recorded a gain of $333,000 included in “gain on disposition of real estate facilities”. We also received additional proceeds, from a previously condemned facility, recording a gain included in discontinued operations totaling $437,000.

4.	Investments in Real Estate Entities

The following table sets forth our investments in the real estate entities at March 31, 2010 and December 31, 2009, and our equity in earnings of real estate entities for the three months ended March 31, 2010 and 2009 (amounts in thousands):

	Investments in Real Estate Entities at				Equity in Earnings of Real Estate Entities for the Three Months Ended March 31,
	March 31, 2010		December 31, 2009		2010		2009
PSB	$	326,652	$	326,145	$	6,274	$	20,466
Shurgard Europe		260,806		272,345		3,310		1,901
Other Investments		13,646		13,826		377		444
Total	$	601,104	$	612,316	$	9,961	$	22,811

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Included in equity in earnings of real estate entities for the three months ended March 31, 2009 is $16,284,000, representing our share of the earnings allocated from PSB’s preferred shareholders as a result of PSB’s repurchases of preferred stock and preferred units for amounts that were less than the related book value, during the period.

During the three months ended March 31, 2010 and 2009, we received cash distributions from our investments in real estate entities totaling $12,706,000 and $11,819,000, respectively.

During three months ended March 31, 2010 and 2009, our investment in Shurgard Europe decreased by $8,467,000 and $10,366,000, respectively, due to foreign currency translation adjustments.

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange, which controls an operating partnership (collectively, the REIT and the operating partnership are referred to as “PSB”). We have a 41% common equity interest in PSB as of March 31, 2010 and December 31, 2009, comprised of our ownership of 5,801,606 shares of PSB’s common stock and 7,305,355 limited partnership units in the operating partnership. The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock. Based upon the closing price at March 31, 2010 ($53.40 per share of PSB common stock), the shares and units had a market value of approximately $699.9 million as compared to a book value of $326.7 million. We account for our investment in PSB using the equity method.

The following table sets forth selected financial information of PSB; the amounts represent 100% of PSB’s balances and not our pro-rata share.

	2010			2009
	(Amounts in thousands)
For the three months ended March 31,
Total revenue	$	67,305		$	69,309
Costs of operations		(22,966	)		(22,436	)
Depreciation and amortization		(18,190	)		(22,614	)
General and administrative		(2,749	)		(1,976	)
Other items		4,441			(584	)
Net income	$	27,841		$	21,699

	At March 31, 2010			At December 31, 2009
	(Amounts in thousands)

Total assets (primarily real estate)	$	1,567,758		$	1,564,822
Debt		52,544			52,887
Other liabilities		45,643			46,298
Preferred stock and units		699,464			699,464
Common equity	$	770,107		$	766,173

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Investment in Shurgard Europe

At March 31, 2010, we had a 49% equity investment in Shurgard Europe, which owns 115 facilities directly and has a 20% interest in 72 self-storage facilities located in Europe which operate under the “Shurgard Storage Centers” name.

Our equity in earnings from our investment in Shurgard Europe for the three months ended March 31, 2010 and 2009, totaling $3,310,000 and $1,901,000, respectively, are comprised of (i) losses of $3,072,000 and $3,251,000, respectively, representing our 49% pro-rata share of Shurgard Europe’s net loss for the respective periods and (ii) income of $6,382,000 and $5,152,000, respectively, representing our 49% pro-rata share of the interest income and trademark license fees received from Shurgard Europe for the respective periods (such amounts are presented as equity in earnings of real estate entities rather than interest and other income).

During the three months ended March 31, 2010 and 2009, our investment in Shurgard Europe decreased by approximately $8,467,000 and $10,366,000, respectively, due to the impact of changes in foreign currency exchange rates.

The following table sets forth selected financial information of Shurgard Europe. These amounts are based upon 100% of Shurgard Europe’s balances (on a consolidated basis, including the operations of the 72 self-storage facilities in which Shurgard Europe has a 20% interest), rather than our pro rata share, and are based upon our historical acquired book basis.

	2010			2009
	(Amounts in thousands)
For the three months ended March 31,
Self-storage and ancillary revenues	$	58,408		$	51,044
Interest and other income (expense)		76			129
Self-storage and ancillary cost of operations		(25,459	)		(23,922	)
Trademark license fee payable to Public Storage		(415	)		(362	)
Depreciation and amortization		(18,739	)		(17,436	)
General and administrative		(1,912	)		(1,718	)
Interest expense on third party debt		(2,777	)		(4,225	)
Interest expense on loan payable to Public Storage		(12,609	)		(10,151	)
Expenses from foreign currency exchange		(193	)		(587	)
Discontinued operations		-			8
Net loss	$	(3,620	)	$	(7,220	)

Net income (loss) allocated to permanent noncontrolling equity interests in subsidiaries (a)		2,649			(586	)
Net loss allocated to Shurgard Europe	$	(6,269	)	$	(6,634	)

	At March 31, 2010			At December 31, 2009
	(Amounts in thousands)

Total assets (primarily self-storage facilities)	$	1,529,320		$	1,617,579
Total debt to third parties		302,134			328,510
Total debt to Public Storage		527,243			561,703
Other liabilities		75,289			75,074
Equity	$	624,654		$	652,292

(a)	During the three months ended March 31, 2010 and 2009, approximately $3,145,000 and $2,739,000, respectively, of depreciation and amortization expense was allocated to permanent noncontrolling equity interests in subsidiaries.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Other Investments

At March 31, 2010, the “Other Investments” include an aggregate common equity ownership of approximately 24% in entities that collectively own 19 self-storage facilities. We account for our investments in these entities using the equity method.

The following table sets forth certain condensed financial information (representing 100% of these entities’ balances and not our pro-rata share) with respect to the Other Investments’ 19 facilities that we have an interest in at March 31, 2010:

	2010			2009
	(Amounts in thousands)
For the three months ended March 31,
Total revenue	$	4,098		$	4,114
Cost of operations and other expenses		(1,711	)		(1,670	)
Depreciation and amortization		(610	)		(479	)
Net income	$	1,777		$	1,965

	At March 31, 2010			At December 31, 2009
	(Amounts in thousands)

Total assets (primarily self-storage facilities)	$	36,933		$	37,386
Total accrued and other liabilities		1,073			876
Total Partners’ equity	$	35,860		$	36,510

5.	Line of Credit and Notes Payable

At March 31, 2010, we have a revolving credit agreement (the “Credit Agreement”) which expires on March 27, 2012, with an aggregate limit with respect to borrowings and letters of credit of $300 million. Amounts drawn on the Credit Agreement bear an annual interest rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 0.35% to LIBOR plus 1.00% depending on our credit ratings (LIBOR plus 0.35% at March 31, 2010). In addition, we are required to pay a quarterly facility fee ranging from 0.10% per annum to 0.25% per annum depending on our credit ratings (0.10% per annum at March 31, 2010). We had no outstanding borrowings on our Credit Agreement at March 31, 2010 or at May 7, 2010. At March 31, 2010, we had undrawn standby letters of credit, which reduce our borrowing capability with respect to our line of credit by the amount of the letters of credit, totaling $18,270,000 ($18,270,000 at December 31, 2009).

The carrying amounts of our notes payable at March 31, 2010 and December 31, 2009 consist of the following (dollar amounts in thousands):

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

	March 31, 2010		December 31, 2009
	(Amounts in thousands)
Unsecured Notes Payable:

5.875% effective and stated note rate, interest only and payable semi-annually, matures in March 2013	$	186,460	$	186,460
5.7% effective rate, 7.75% stated note rate, interest only and payable semi-annually, matures in February 2011 (carrying amount includes $1,502 of unamortized premium at March 31, 2010 and $1,889 at December 31, 2009)		104,818		105,206

Secured Notes Payable:

5.5% average effective rate fixed rate mortgage notes payable, secured by 89 real estate facilities with a net book value of approximately $556 million at March 31, 2010 and stated note rates between 4.95% and 8.00%, maturing at varying dates between April 2010 and September 2028 (carrying amount includes $3,578 of unamortized premium at March 31, 2010 and $3,983 at December 31, 2009)		224,854		227,223

Total notes payable	$	516,132	$	518,889

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

On February 12, 2009, we acquired $110,223,000 face amount of our existing unsecured notes pursuant to a tender offer for an aggregate of $109,622,000 in cash, and recognized a gain of $4,114,000 for the three months ended March 31, 2009.

Our notes payable and our Credit Agreement each have various customary restrictive covenants, all of which have been met at March 31, 2010. At March 31, 2010, approximate principal maturities of our notes payable are as follows (amounts in thousands):

	Unsecured Notes Payable			Secured Notes Payable			Total
2010 (remainder)	$	1,285		$	8,668		$	9,953
2011		103,533			27,819			131,352
2012		-			55,575			55,575
2013		186,460			64,961			251,421
2014		-			25,400			25,400
Thereafter		-			42,431			42,431
	$	291,278		$	224,854		$	516,132
Weighted average effective rate		5.8	%		5.5	%		5.7	%

We incurred interest expense (including interest capitalized as real estate totaling $72,000 and $190,000, respectively for the three months ended March 31, 2010 and 2009) with respect to our notes payable, capital leases and line of credit aggregating $7,411,000 and $8,318,000 for the three months ended March 31, 2010 and 2009, respectively. These amounts were comprised of $8,203,000 and $9,282,000 in cash paid during the three months ended March 31, 2010 and 2009, respectively, less $792,000 and $964,000 in amortization of premium, respectively.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

6.	Noncontrolling Interests in Subsidiaries

In consolidation, we classify ownership interests in the net assets of each of the Subsidiaries, other than our own, as “noncontrolling interests in subsidiaries.” Interests that have the ability to require us, except in an entity liquidation, to redeem the underlying securities for cash, assets, or other securities that would not also be classified as equity are presented on our balance sheet outside of equity. At the end of each reporting period, if the book value is less than the estimated amount to be paid upon a redemption occurring on the related balance sheet date, these interests are increased to adjust to their estimated liquidation value (which approximates fair value), with the offset against retained earnings. All other noncontrolling interests in subsidiaries are presented as a component of equity, “permanent noncontrolling interests in subsidiaries.”

Redeemable Noncontrolling Interests in Subsidiaries

At March 31, 2010, the Redeemable Noncontrolling Interests in Subsidiaries represent equity interests in three entities that own in aggregate 14 self-storage facilities. During the three months ended March 31, 2010 and 2009, these interests were increased by $65,000 and $99,000, respectively, to adjust to their estimated liquidation value (which approximates fair value). We estimate the amount to be paid upon redemption of these interests by applying the related provisions of the governing documents to our estimate of the fair value of the underlying net assets (principally real estate assets).

During the three months ended March 31, 2010 and 2009, we allocated a total of $223,000 and $262,000, respectively, of income to these interests. During the three months ended March 31, 2010 and 2009, we paid distributions to these interests totaling $304,000 and $340,000, respectively.

Permanent Noncontrolling Interests in Subsidiaries

At March 31, 2010, the Permanent Noncontrolling Interests in Subsidiaries represent (i) equity interests in 28 entities that own an aggregate of 94 self-storage facilities (the “Other Permanent Noncontrolling Interests in Subsidiaries”) and (ii) preferred partnership units (the “Preferred Partnership Interests”). These interests are presented as equity because the holders of the interests do not have the ability to require us to redeem them for cash, other assets, or other securities that would not also be classified as equity.

Other Permanent Noncontrolling Interests in Subsidiaries

The total carrying amount of the Other Permanent Noncontrolling Interests in Subsidiaries was $32,428,000 at March 31, 2010 ($32,974,000 at December 31, 2009). During the three months ended March 31, 2010 and 2009, we allocated a total of $3,921,000 and $4,148,000, respectively, in income to these interests and we paid distributions to these interests totaling $4,467,000 and $4,058,000, respectively.

Preferred Partnership Interests

At March 31, 2010 and December 31, 2009, our preferred partnership units outstanding were comprised of 4,000,000 units of our 7.250% Series J preferred units ($100,000,000 carrying amount, redeemable May 9, 2011). Subject to certain conditions, the Series J preferred units are convertible into our 7.25% Series J Cumulative Preferred Shares.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

In the three months ended March 31, 2009, in connection with our acquisition of preferred partnership units from third parties for an aggregate of $153.0 million, we recorded an allocation of $72.0 million in income from these interests in determining net income allocable to Public Storage shareholders based upon the excess of the carrying amount over the amount paid.

During the three months ended March 31, 2010 and 2009, we allocated a total of $1,812,000 and $4,017,000, respectively, in income to these interests based upon distributions paid.

7.	Public Storage Shareholders’ Equity

Cumulative Preferred Shares

At March 31, 2010 and December 31, 2009, we had the following series of Cumulative Preferred Shares of beneficial interest outstanding:

					At March 31, 2010				At December 31, 2009
Series	Earliest Redemption Date	Dividend Rate			Shares Outstanding		Liquidation Preference		Shares Outstanding		Liquidation Preference
					(Dollar amounts in thousands)
Series V	9/30/07		7.500	%		6,200	$	155,000		6,200	$	155,000
Series W	10/6/08		6.500	%		5,300		132,500		5,300		132,500
Series X	11/13/08		6.450	%		4,800		120,000		4,800		120,000
Series Y	1/2/09		6.850	%		750,900		18,772		750,900		18,772
Series Z	3/5/09		6.250	%		4,500		112,500		4,500		112,500
Series A	3/31/09		6.125	%		4,600		115,000		4,600		115,000
Series B	6/30/09		7.125	%		4,350		108,750		4,350		108,750
Series C	9/13/09		6.600	%		4,425		110,625		4,425		110,625
Series D	2/28/10		6.180	%		5,400		135,000		5,400		135,000
Series E	4/27/10		6.750	%		5,650		141,250		5,650		141,250
Series F	8/23/10		6.450	%		9,893		247,325		9,893		247,325
Series G	12/12/10		7.000	%		4,000		100,000		4,000		100,000
Series H	1/19/11		6.950	%		4,200		105,000		4,200		105,000
Series I	5/3/11		7.250	%		20,700		517,500		20,700		517,500
Series K	8/8/11		7.250	%		16,990		424,756		16,990		424,756
Series L	10/20/11		6.750	%		8,267		206,665		8,267		206,665
Series M	1/9/12		6.625	%		19,065		476,634		19,065		476,634
Series N	7/2/12		7.000	%		6,900		172,500		6,900		172,500
Total Cumulative Preferred Shares						886,140	$	3,399,777		886,140	$	3,399,777

The holders of our Cumulative Preferred Shares have general preference rights with respect to liquidation and quarterly distributions. Holders of the preferred shares, except under certain conditions and as noted below, will not be entitled to vote on most matters. In the event of a cumulative arrearage equal to six quarterly dividends, holders of all outstanding series of preferred shares (voting as a single class without regard to series) will have the right to elect two additional members to serve on our Board of Trustees until events of default have been cured. At March 31, 2010, there were no dividends in arrears.

Except under certain conditions relating to the Company’s qualification as a REIT, the Cumulative Preferred Shares are not redeemable prior the dates indicated on the table above. On or after the respective dates, each of the series of Cumulative Preferred Shares will be redeemable, at the option of the Company, in whole or in part, at $25.00 per share (or depositary share as the case may be), plus accrued and unpaid dividends. Holders of the Cumulative Preferred Shares do not have the right to require the Company to redeem such shares.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Upon issuance of our Cumulative Preferred Shares of beneficial interest, we classify the liquidation value as preferred equity on our consolidated balance sheet with any issuance costs recorded as a reduction to paid-in capital.

During March 2009, we repurchased certain of our Cumulative Preferred Shares in privately negotiated transactions as follows: Series V – 700,000 depositary shares, each representing 1/1,000 of a share of our Cumulative Preferred Shares at a total cost of $13,230,000, Series C – 175,000 depositary shares, each representing 1/1,000 of a share of our Cumulative Preferred Shares at a total cost of $2,695,000 and Series F – 107,000 depositary shares, each representing 1/1,000 of a share of our Cumulative Preferred Shares at a total cost of $1,610,000. The carrying value of the shares repurchased totaled $23.8 million ($24.6 million liquidation preference less $0.8 million of original issuance costs), and exceeded the aggregate repurchase cost of $17.5 million by approximately $6.2 million. For purposes of determining net income per share, income allocated to our preferred shareholders was reduced by the $6.2 million for the three months ended March 31, 2009.

See Note 12 “Subsequent Events” for further discussion regarding our Cumulative Preferred Shares.

Equity Shares, Series A

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. The aggregate redemption amount of $205.4 million was classified as a liability at March 31, 2010.

During each of the three months ended March 31, 2010 and 2009, we paid quarterly distributions to the holders of the Equity Shares, Series A of $0.6125 per share.

Equity Shares, Series AAA

We have $100,000,000 (4,289,544 shares) of Equity Shares, Series AAA (“Equity Shares AAA”) outstanding at March 31, 2010 and December 31, 2009. The Equity Shares AAA ranks on a parity with common shares and junior to the Senior Preferred Shares with respect to general preference rights, and has a liquidation amount equal to 120% of the amount distributed to each common share. Annual distributions per share are equal to the lesser of (i) five times the amount paid per common share or (ii) $2.1564. We have no obligation to pay distributions if no distributions are paid to common shareholders. During each of the three month periods ended March 31, 2010 and 2009, we paid quarterly distributions to the holder of the Equity Shares, Series AAA of $0.5391 per share. For all periods presented, the Equity Shares, Series AAA and related dividends are eliminated in consolidation as the shares are held by a Subsidiary.

Dividends

The unaudited characterization of dividends for Federal income tax purposes is made based upon earnings and profits of the Company, as defined by the Internal Revenue Code. Common share dividends including amounts paid to our restricted share unitholders totaled $109.9 million ($0.65 per share) and $92.9 million ($0.55 per share), for the three months ended March 31, 2010 and 2009, respectively. Equity Shares, Series A dividends totaled $5.1 million ($0.6125 per share) for each of the three month periods ended March 31, 2010 and 2009. Preferred share dividends pay fixed rates from 6.125% to 7.500% with a total liquidation amount of $3,399,777,000 at March 31, 2010 and December 31, 2009 and dividends aggregating $58.1 million for each of the three months ended March 31, 2010 and 2009, respectively.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

8.	Related Party Transactions

Mr. Hughes, Public Storage’s Chairman of the Board of Trustees, and his family (collectively the “Hughes Family”) have ownership interests in, and operate approximately 52 self-storage facilities in Canada using the “Public Storage” brand name (“PS Canada”) pursuant to a royalty-free trademark license agreement with Public Storage. We currently do not own any interests in these facilities nor do we own any facilities in Canada. The Hughes Family owns approximately 17.3% of our common shares outstanding at March 31, 2010. We have a right of first refusal to acquire the stock or assets of the corporation that manages the 52 self-storage facilities in Canada, if the Hughes Family or the corporation agrees to sell them. However, we have no interest in the operations of this corporation, we have no right to acquire this stock or assets unless the Hughes Family decides to sell and we receive no benefit from the profits and increases in value of the Canadian self-storage facilities.

We reinsure risks relating to loss of goods stored by tenants in the self-storage facilities in Canada. During the three months ended March 31, 2010 and 2009, we received $159,000 and $183,000 (based upon historical exchange rates between the U.S. Dollar and Canadian Dollar in effect as the revenues were earned), respectively, in reinsurance premiums attributable to the Canadian facilities. Since our right to provide tenant reinsurance to the Canadian facilities may be qualified, there is no assurance that these premiums will continue.

Public Storage and Mr. Hughes are co-general partners in certain consolidated partnerships and affiliated partnerships of Public Storage that are not consolidated. The Hughes Family owns 47.9% of the voting stock and Public Storage holds 46% of the voting and 100% of the nonvoting stock (representing substantially all the economic interest) of a private REIT. The private REIT owns limited partnership interests in five affiliated partnerships. The Hughes Family also owns limited partnership interests in certain of these partnerships and holds securities in PSB. PS Canada holds approximately a 1.2% interest in Stor-RE, a consolidated entity that provides liability and casualty insurance for PS Canada, Public Storage and certain affiliates of Public Storage, for occurrences prior to April 1, 2004 as described below. Public Storage and the Hughes Family receive distributions from these entities in accordance with the terms of the partnership agreements or other organizational documents.

9. Share-Based Compensation

Stock Options

We have various stock option plans (collectively referred to as the “PS Plans”). Under the PS Plans, the Company has granted non-qualified options to certain trustees, officers and key employees to purchase the Company’s common shares at a price equal to the fair market value of the common shares at the date of grant. Options granted after December 31, 2002 vest generally over a five-year period and expire between eight years and ten years after the date they became exercisable. The PS Plans also provide for the grant of restricted shares (see below) to officers, key employees and service providers on terms determined by an authorized committee of our Board.

We recognize compensation expense for stock options based upon their estimated fair value on the date of grant amortized over the applicable vesting period (the “Fair Value Method”), net of estimates for future forfeitures. We estimate the fair value of our stock options based upon the Black-Scholes option valuation model.

For each of the three months ended March 31, 2010 and 2009, we recorded $600,000 in stock option compensation expense related to options granted after January 1, 2002.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

A total of 105,000 stock options were granted during the three months ended March 31, 2010, 202,177 shares were exercised, and no shares were forfeited. A total of 3,598,491 stock options were outstanding at March 31, 2010 (3,695,668 at December 31, 2009).

Outstanding stock options are included on a one-for-one basis in our diluted weighted average shares, less a reduction for the treasury stock method applied to a) the average cumulative measured but unrecognized compensation expense during the period and b) the strike price proceeds expected from the employee upon exercise.

Restricted Share Units

Outstanding restricted share units vest ratably over either five or eight years (depending upon the terms of each individual grant) from the date of grant. The employee receives additional compensation equal to the per-share dividends received by common shareholders with respect to restricted share units outstanding. Such compensation is accounted for as dividends paid. Any dividends paid on units which are subsequently forfeited are expensed. Upon vesting, the employee receives common shares equal to the number of vested restricted share units in exchange for the units.

The total value of each restricted share unit grant, based upon the market price of our common shares at the date of grant, is amortized over the service period, net of estimates for future forfeitures, as compensation expense. The related employer portion of payroll taxes is expensed as incurred.

During the three months ended March 31, 2010, 94,864 restricted share units were granted, 24,735 restricted share units were forfeited and 80,477 restricted share units vested. This vesting resulted in the issuance of 49,879 common shares. In addition, cash compensation totaling $2,292,000 was paid to employees in lieu of 30,598 common shares based upon the market value of the shares at the date of vesting is used to settle the employees’ tax liability generated by the vesting and is charged against paid in capital.

At March 31, 2010, approximately 538,006 restricted share units were outstanding (548,354 at December 31, 2009). A total of $2,032,000 and $2,013,000 in restricted share unit expense was recorded for the three months ended March 31, 2010 and 2009, respectively. Restricted share unit expense includes amortization of the grant-date fair value of the units reflected as an increase to paid-in capital, as well as $164,000 and $113,000 in related payroll taxes we incurred in the three months ended March 31, 2010 and 2009, respectively.

See also “net income per common share” in Note 2 for further discussion regarding the impact of restricted share units on our net income per common and income allocated to common shareholders.

10. Segment Information

Our reportable segments reflect significant operating activities that are evaluated separately by management, and are organized based upon their operating characteristics. Each of our segments is evaluated by management based upon net segment income. Net segment income represents net income in conformity with GAAP and our significant accounting policies as denoted in Note 2.

We had previously grouped our Commercial Segment with other ancillary activities such as reinsurance of policies against losses to goods stored by tenants in our self-storage facilities, merchandise sales, truck rentals, and containerized storage. Due to the termination of our containerized storage and truck rental operations, these other ancillary activities as a group have become less significant and as a result no longer represent a reportable segment either individually or as a group. We have adjusted the classification of the “Presentation of Segment Information” below with respect to prior periods to be consistent with our current segment definition.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

Following is the description of and basis for presentation for each of our segments.

Domestic Self-Storage Segment

The Domestic Self-Storage Segment comprises our domestic self-storage rental operations, and is our predominant segment. It includes the operations of the 1,989 self storage facilities owned by the Company and the Subsidiaries, as well as our equity share of the 19 self-storage facilities that we account for on the equity method. None of our interest and other income, interest expense or the related debt, general and administrative expense, or gains and losses on the sale of self-storage facilities is allocated to our Domestic Self-Storage segment because management does not consider these items in evaluating the results of operations of the Domestic Self-Storage segment. At March 31, 2010, the assets of the Domestic Self-Storage segment are comprised principally of our self-storage facilities with a book value of $7.5 billion ($7.6 billion at December 31, 2009), Tenant Intangibles with a book value of approximately $18.5 million ($19.4 million at December 31, 2009), and the Other Investments with a net book value of $13.6 million ($13.8 million at December 31, 2009). Substantially all of our other assets totaling $101.4 million, and our accrued and other liabilities totaling $201.4 million, ($92.9 million and $212.3 million, respectively, at December 31, 2009) are directly associated with the Domestic Self-Storage segment.

Europe Self-Storage Segment

The Europe Self-Storage segment comprises our interest in Shurgard Europe, which has a separate management team that makes the financing, capital allocation, and other significant decisions for this operation. The Europe Self-Storage segment presentation includes our equity share of Shurgard Europe’s operations, the interest and other income received from Shurgard Europe, as well as specific general and administrative expense, disposition gains, and foreign currency exchange gains and losses that management considers in evaluating our investment in Shurgard Europe. At March 31, 2010, our condensed consolidated balance sheet includes an investment in Shurgard Europe with a book value of $260.8 million ($272.3 million at December 31, 2009) and a loan receivable from Shurgard Europe totaling $527.2 million ($561.7 million at December 31, 2009).

Commercial Segment

The Commercial segment comprises our investment in PSB, a self-managed Real Estate Investment Trust with a separate management team that makes the financing, capital allocation and other significant decisions. The Commercial segment also includes our direct interest in certain commercial facilities, substantially all of which are managed by PSB. The Commercial segment presentation includes our equity income from PSB, as well as the revenues and expenses of our commercial facilities. At March 31, 2010, the assets of the Commercial segment are comprised principally of our investment in PSB which has a book value of $326.7 million ($326.1 million at December 31, 2009).

Presentation of Segment Information

The following tables reconcile the performance of each segment, in terms of segment income, to our consolidated net income (amounts in thousands):

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

For the three months ended March 31, 2010

	Domestic Self-Storage			Europe Self-Storage			Commercial		Other Items Not Allocated to Segments			Total Consolidated
	(Amounts in thousands)
Revenues:
Self-storage facilities	$	364,682		$	-		$	-	$	-		$	364,682
Ancillary operations		-			-			3,697		21,461			25,158
Interest and other income		-			6,642			-		1,574			8,216
		364,682			6,642			3,697		23,035			398,056

Expenses:
Cost of operations:
Self-storage facilities		132,684			-			-		-			132,684
Ancillary operations		-			-			1,437		6,993			8,430
Depreciation and amortization		84,173			-			655		-			84,828
General and administrative		-			-			-		10,077			10,077
Interest expense		-			-			-		7,339			7,339
		216,857			-			2,092		24,409			243,358

Income (loss) from continuing operations before equity in earnings of real estate entities, gains on disposition of other real estate investments, asset impairment charges facilities and foreign currency exchange loss		147,825			6,642			1,605		(1,374	)		154,698

Equity in earnings of real estate entities		377			3,310			6,274		-			9,961
Gains on disposition of other real estate investments		-			-			-		333			333
Asset impairment charges		(1,008	)		-			-		-			(1,008	)
Foreign currency exchange loss		-			(34,843	)		-		-			(34,843	)
Income (loss) from continuing operations		147,194			(24,891	)		7,879		(1,041	)		129,141
Discontinued operations		-			-			-		776			776
Net income (loss)	$	147,194		$	(24,891	)	$	7,879	$	(265	)	$	129,917

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

For the three months ended March 31, 2009

	Domestic Self-Storage		Europe Self-Storage			Commercial		Other Items Not Allocated to Segments			Total Consolidated
	(Amounts in thousands)
Revenues:
Self-storage facilities	$	370,772	$	-		$	-	$	-		$	370,772
Ancillary operations		-		-			3,679		22,156			25,835
Interest and other income		-		5,361			-		2,272			7,633
		370,772		5,361			3,679		24,428			404,240

Expenses:
Cost of operations:
Self-storage facilities		133,265		-			-		-			133,265
Ancillary operations		-		-			1,411		8,242			9,653
Depreciation and amortization		83,512		-			980		-			84,492
General and administrative		-		-			-		9,679			9,679
Interest expense		-		-			-		8,128			8,128
		216,777		-			2,391		26,049			245,217

Income (loss) from continuing operations before equity in earnings of real estate entities, gains on disposition of other real estate investments, gain on early retirement of debt and foreign currency exchange loss		153,995		5,361			1,288		(1,621	)		159,023

Equity in earnings of real estate entities		444		1,901			20,466		-			22,811
Gains on disposition of other real estate investments		-		-			-		2,722			2,722
Gain on early retirement debt		-		-			-		4,114			4,114
Foreign currency exchange loss		-		(34,733	)		-		-			(34,733	)
Income (loss) from continuing operations		154,439		(27,471	)		21,754		5,215			153,937
Discontinued operations		-		-			-		(508	)		(508	)
Net income (loss)	$	154,439	$	(27,471	)	$	21,754	$	4,707		$	153,429

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

11. Commitments and Contingencies

Legal Matters

Brinkley v. Public Storage, Inc. (filed April 2005) (Superior Court of California – Los Angeles County)

The plaintiff sued the Company on behalf of a purported class of California non-exempt employees based on various California wage and hour laws. Plaintiff sought certification for alleged meal period violations, rest period violations, failure to pay for travel time, failure to pay for mileage reimbursement, and for wage statement violations. The Court certified subclasses based only on alleged meal period and wage statement violations. In June 2007, the Court granted the Company’s summary judgment motion as to the causes of action relating to the subclasses certified and dismissed those claims. Plaintiff appealed. The Court of Appeals sustained the dismissal. The California Supreme Court granted review but deferred the matter pending disposition of a related issue in another case.

Other Items

We are a party to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time that are not described above. We believe that it is unlikely that the outcome of these other pending legal proceedings including employment and tenant claims, in the aggregate, will have a material adverse impact upon our operations or financial position.

Insurance and Loss Exposure

We have historically carried customary property, earthquake, general liability and workers compensation coverage through internationally recognized insurance carriers, subject to customary levels of deductibles. The aggregate limits on these policies of $75 million for property coverage and $102 million for general liability are higher than estimates of maximum probable loss that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exhausted.

Our tenant insurance program reinsures a program that provides insurance to certificate holders against claims for property losses due to specific named perils (earthquakes and floods are not covered by these policies) to goods stored by tenants at our self-storage facilities for individual limits up to a maximum of $5,000. We have third-party insurance coverage for claims paid exceeding $1,000,000 resulting from any one individual event, to a limit of $25,000,000. At March 31, 2010, there were approximately 604,000 certificate holders held by our tenants participating in this program, representing aggregate coverage of approximately $1.3 billion. Because each certificate represents insurance of goods held by a tenant at our self-storage facilities, the geographic concentration of this $1.3 billion in coverage is dispersed throughout all of our U.S. facilities. We rely on a third-party insurance company to provide the insurance and are subject to licensing requirements and regulations in several states.

Operating Lease Obligations

We lease land, equipment and office space under various operating leases. At March 31, 2010, the approximate future minimum rental payments required under our operating leases for each calendar year is as follows: $5 million for the remainder of 2010, $6 million per year in 2011 and 2012, $5 million per year in 2013 and 2014, and an aggregate of $71 million in payments thereafter.

Expenses under operating leases were approximately $1.9 million for each of the three month periods ended March 31, 2010 and 2009.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2010

12. Subsequent Events

We entered into an agreement to acquire 30 self-storage facilities for $189 million, consisting of the assumption of debt totaling $100 million and $89 million of cash. Twenty-eight of the facilities (1.8 million square feet) are located in the Los Angeles area and the surrounding communities of Southern California. The other two facilities (107,000 square feet) are located in the Chicago area. The closing will occur in stages through June 30, 2010. As of May 7, 2010, we closed on eight facilities with a total acquisition cost of $38 million. These acquisitions are subject to customary closing conditions, and there can be no assurance that we will be able to complete the acquisition of the remaining facilities.

During April and May, 2010, we issued in aggregate 5,800,000 depositary shares each representing 1/1,000 of a 6.875% Cumulative Preferred Share of Beneficial Interest, Series O, for gross proceeds of $145,000,000.

On April 15, 2010, we called for redemption our Series V Cumulative Preferred Shares, at par. The aggregate redemption amount, before payment of accrued dividends, to be paid on May 18, 2010, is $155,000,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto.

Forward Looking Statements: This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements in this document, other than statements of historical fact, are forward-looking statements which may be identified by the use of the words "expects," "believes," "anticipates," "plans," "would," "should," "may," "estimates" and similar expressions. These forward-looking statements involve known and unknown risks and uncertainties, which may cause Public Storage's actual results and performance to be materially different from those expressed or implied in the forward-looking statements. As a result, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, as predictions of future events nor guarantees of future performance. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement. 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 expressly required by law. Accordingly, you should use caution in relying on past forward-looking statements to anticipate future results.

Factors and risks that may impact our future results and performance include, but are not limited to, those described in Part II, Item 1A, "Risk Factors" in this Form 10-Q and in our other filings with the Securities and Exchange Commission (“SEC”).

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The preparation of our financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and results of operations requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. The notes to our March 31, 2010 condensed consolidated financial statements, primarily Note 2, summarize the significant accounting policies and methods used in the preparation of our consolidated financial statements and related disclosures.

Management believes the following are critical accounting policies, the application of which has a material impact on the Company’s financial presentation. That is, they are both important to the portrayal of our financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain.

Qualification as a REIT – Income Tax Expense: We believe that we have been organized and operated, and we intend to continue to operate, as a qualifying REIT under the Internal Revenue Code and applicable state laws. We also believe that Shurgard, prior to merging with us, qualified as a REIT. A REIT generally does not pay corporate level federal income taxes on its REIT taxable income that is distributed to its shareholders, and accordingly, we do not pay federal income tax on the share of our REIT taxable income that is distributed to our shareholders.

We therefore do not estimate or accrue any federal income tax expense for income earned and distributed related to REIT operations. This estimate could be incorrect, because due to the complex nature of the REIT qualification requirements, the ongoing importance of factual determinations and the possibility of future changes in our circumstances, we cannot be assured that we actually have satisfied or will satisfy the requirements for taxation as a REIT for any particular taxable year. For any taxable year that we fail or have failed to qualify as a REIT and for which applicable relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income, whether or not we made or make any distributions to our shareholders. Any resulting requirement to pay corporate income tax, including any applicable penalties or interest, could have a material adverse impact on our financial condition or results of operations. Unless entitled to relief under specific statutory provisions, we also would not be eligible to elect REIT status for any taxable year prior to the fifth taxable year which begins after the first taxable year for which REIT status was terminated. There can be no assurance that we would be entitled to any statutory relief. In addition, if Shurgard failed to qualify as a REIT, we would succeed to significant tax liabilities.

Impairment of Long-Lived Assets: Substantially all of our assets consist of real estate which are long-lived assets. The evaluation of our long-lived assets for impairment includes determining whether indicators of impairment exist, which is a subjective process. When any indicators of impairment are found, the evaluation of such long-lived assets then entails projections of future operating cash flows, which also involves significant judgment. Future events, or facts and circumstances that currently exist, that we have not yet identified, could cause us to conclude in the future that our long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Estimated Useful Lives of Long-Lived Assets: Substantially all of our assets consist of depreciable or amortizable long-lived assets. We record depreciation and amortization expense with respect to these assets based upon their estimated useful lives. Any change in the estimated useful lives of those assets, caused by functional or economic obsolescence or other factors, could have a material adverse impact on our financial condition or results of operations.

Accruals for Contingencies: We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with GAAP, we have not accrued for certain potential liabilities because the loss is either not probable or not estimable or because we are not aware of the event. Future events and the results of pending litigation could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations. Significant unaccrued losses that we have determined are at least reasonably possible are described in Note 11 to our March 31, 2010 condensed consolidated financial statements.

Accruals for Operating Expenses: Certain of our expenses are estimated based upon assumptions regarding past and future trends, such as losses for workers compensation and employee health plans, and estimated claims for our tenant reinsurance program. Our property tax expense, which as a real estate operator, represents one of our largest expenses totaling approximately $42 million in the three months ended March 31, 2010, has significant estimated components. Most notably, in certain jurisdictions we do not receive tax bills for the current fiscal year until after our earnings are finalized, and as a result, we must estimate tax expense based upon anticipated implementation of regulations and trends. If these estimates and assumptions were incorrect, our expenses could be misstated.

Valuation of assets and liabilities acquired in business combinations: We have estimated the fair value of real estate, intangible assets, debt, and the other assets and other liabilities acquired in business combinations, most notably the Shurgard Merger. We have acquired these assets, in certain cases, with non-cash assets, most notably the 38.9 million shares that we issued to the Shurgard shareholders. These estimates are based upon many assumptions, including interest rates, market values of land and buildings in the U.S. and Europe, estimated future cash flows from the tenant base in place at the time of the merger, and the recoverability of certain assets. We believe that the assumptions used were reasonable, however, these assumptions were subject to a significant degree of judgment, and others could use different assumptions and therefore come to materially different conclusions as to the estimated values. If estimated values had been different, our depreciation and amortization expense, interest expense, investments in real estate entities, real estate, debt, and intangible assets could be materially different.

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 and focus is placed upon maximizing revenues and effectively managing expenses at our self-storage facilities, as the Domestic Self-Storage segment comprises 94% of our operating revenue for the three months ended March 31, 2010, and is the primary driver of growth in our net income and cash flow from operations.

The remainder of our operations are comprised of our Europe Self-Storage segment, our Commercial segment, and the operations not allocated to any segment, each of which is described in Note 10 to our March 31, 2010 condensed consolidated financial statements.

The self-storage industry is subject to general economic conditions, particularly those that affect the disposable income and spending of consumers, as well as those that affect moving trends. Due to the recessionary pressures in the U.S., demand for self-storage space has been negatively impacted since the fourth quarter of 2008. As a result, we have experienced downward pressure on occupancy levels, rental rates, and revenues in our self-storage facilities have declined on a year-over-year basis since the first quarter of 2009. We have seen some improvement in year-over-year occupancy levels and revenue trends, as weighted average occupancy was higher by 0.6% and revenue declined by 2.2% in the quarter ended March 31, 2010, which is the lowest decline since the first quarter of 2009. However, there can be no assurance that these improvements will continue.

Another important determinant of our long-term growth is our access to capital and deployment of that capital in order to expand our asset base. Acquisitions of self-storage facilities were minimal during 2008 and 2009. On April 1, 2010, we entered into an agreement to acquire 30 self-storage facilities for $189 million, consisting of cash of $89 million and debt assumption of $100 million. Twenty-eight of the facilities (1.8 million square feet) are located in the Los Angeles area and the surrounding communities of Southern California. The other two facilities (107,000 square feet) are located in the Chicago area. As of May 7, 2010, we have acquired eight of these properties and the remaining properties are expected to close in stages through June 30, 2010. There can be no assurance that the remaining properties will be acquired.

We believe that there may be additional opportunities to acquire additional facilities in 2010 from distressed sellers who, due to the constrained credit environment and pressure on cash flows due to the current difficult operating environment, face covenant violations or are concerned about their ability to refinance their existing debt as it comes due. The timing and amount of these opportunities will be at least partially dependent upon whether lenders elect to pursue foreclosure, acceleration, or other remedies which could force a sale of the properties. It is our belief that opportunities in 2009 were limited due at least in part to lenders’ desire to extend loans rather than foreclose or accelerate. There can be no assurance that any such opportunities will materialize in the future.

Historically we have developed and redeveloped self-storage facilities. Our development activities have substantially ceased due to the existing economic environment and our belief that our capital can be more effectively put to use in other ways.

At March 31, 2010, we had approximately $720 million of cash on hand, $95 million of short-term investments in high-grade corporate notes and we have access to an additional $300 million line of credit that does not expire until March 27, 2012. In addition, in April and May, 2010 we raised in aggregate gross proceeds of approximately $145 million through the issuance of our Series O Cumulative Preferred Shares. Our capital commitments in the 12 months ending March 31, 2011 total approximately $575 million and include (i) $205 million paid in April 2010 to redeem our Equity Shares, Series A, (ii) the $89 million cash portion of the acquisition cost of the 30 self-storage facilities as well as $12 million in related incremental capital expenditures noted below, (iii) $155 million to be paid to redeem our Series V Cumulative Preferred Shares and (iv) $117 million in principal payments on debt. We have no further significant capital commitments until 2013, when $251 million of existing debt comes due.

Our ability to raise additional capital by issuing our common or preferred securities is dependent upon capital market conditions. Capital markets have improved from the severe stress incurred in late 2008 and early 2009. As noted above, in April and May, 2010, we issued in aggregate $145 million (face amount) of cumulative preferred shares at a coupon rate of 6.875%. This rate compares favorably to our last issuance of preferred stock in July 2007, a $172.5 million face amount issued at a 7.0% coupon rate. There can be no assurance that market conditions will continue to permit preferred security issuances at amounts and at rates that we will find reasonable. We do not believe, however, that we are dependent on raising capital to fund our operations or meet our obligations.

Results of Operations

Operating Results for the Three Months Ended March 31, 2010 and 2009:

For the three months ended March 31, 2010, net income allocable to our common shareholders was $34.7 million or $0.21 per common share, on a diluted basis, compared to $159.5 million or $0.95 per common share, on a diluted basis, for the same period in 2009, representing a decrease of $124.8 million or $0.74 per common share. This decrease is primarily due to the application of Emerging Issues Task Force D-42 (“EITF D-42”) in connection with the redemption of our Equity Shares, Series A and repurchases of our preferred securities at costs which differ from the original net issuance proceeds for such securities. Overall, the application of EITF D-42 resulted in a net year-over-year reduction in net income allocable to our common shareholders of approximately $120.2 million or $0.71 per common share on a diluted basis.

During the three months ended March 31, 2010, we called for redemption our Equity Shares, Series A and in applying EITF D-42 the excess redemption cost over the original net issuance proceeds reduced net income allocable to our common shareholders by $25.7 million. Conversely, during the three months ended March 31, 2009, we repurchased a portion of our preferred securities at an aggregate cost that was less than the original net issuance proceeds for these securities and as a result of applying EITF D-42, combined with our 41% equity share of PSB’s benefit from repurchases of preferred securities, net income allocable to our common shareholders was increased by $94.5 million.

Revenues for the Same Store Facilities (defined below) decreased 2.2% or $7.7 million in the quarter ended March 31, 2010 as compared to the same period in 2009, primarily due to a 3.0% reduction in realized rent per occupied square foot, offset by a 0.6% increase in average occupancies. Cost of operations for the Same Store Facilities decreased 0.7% or $0.9 million in the quarter ended March 31, 2010 as compared to the same period in 2009. Net operating income for our Same Store Facilities decreased 3.0% or $6.8 million in the quarter ended March 31, 2010 as compared to the same period in 2009.

Real Estate Operations

Self-Storage Operations: Our self-storage operations are by far the largest component of our operating activities, representing more than 90% of our revenues for the three months ended March 31, 2010 and 2009, respectively.

To enhance year-over-year comparisons, the table that follows summarizes, and the ensuing discussion describes, the operating results of two groups of facilities that management analyzes: (i) the Same Store group, representing the facilities in the Domestic Self-Storage Segment that we have owned and have been operating on a stabilized basis since January 1, 2008 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, 2008 such as newly acquired, newly developed, or recently expanded facilities.

Self-Storage Operations Summary	Three Months Ended March 31,
	2010		2009		Percentage Change
	(Dollar amounts in thousands)
Rental income:
Same Store Facilities	$	347,833	$	355,489		(2.2	)%
Other Facilities		16,849		15,283		10.2	%
		364,682		370,772		(1.6	)%
Cost of operations:
Same Store Facilities		126,537		127,412		(0.7	)%
Other Facilities		6,147		5,853		5.0	%
		132,684		133,265		(0.4	)%
Net operating income (a):
Same Store Facilities		221,296		228,077		(3.0	)%
Other Facilities		10,702		9,430		13.5	%
		231,998		237,507