Edgar Filing: Public Storage

ps3q10_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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 November 4, 2010:

Common Shares of beneficial interest, $.10 par value per share – 170,325,428 shares

PUBLIC STORAGE

INDEX


PART I	FINANCIAL INFORMATION	Pages

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009	1

	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009	2

	Condensed Consolidated Statement of Equity for the Nine Months Ended September 30, 2010	3

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	4 - 5

	Notes to Condensed Consolidated Financial Statements	6 - 33

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34 – 60

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61

Item 4.	Controls and Procedures	62

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

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63 – 64

Item 6.	Exhibits	64

PUBLIC STORAGE

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

	September 30, 2010			December 31, 2009
ASSETS	(Unaudited)

Cash and cash equivalents	$	513,479		$	763,789
Marketable securities		102,131			-
Real estate facilities, at cost:
Land		2,785,630			2,717,368
Buildings		7,773,237			7,575,587
		10,558,867			10,292,955
Accumulated depreciation		(2,975,105	)		(2,734,449	)
		7,583,762			7,558,506
Construction in process		8,298			3,527
		7,592,060			7,562,033

Investment in real estate entities		607,057			612,316
Goodwill, net		174,634			174,634
Intangible assets, net		45,804			38,270
Loan receivable from Shurgard Europe		515,379			561,703
Other assets		100,866			92,900
Total assets	$	9,651,410		$	9,805,645

LIABILITIES AND EQUITY

Notes payable	$	589,518		$	518,889
Accrued and other liabilities		243,629			212,253
Total liabilities		833,147			731,142

Redeemable noncontrolling interests in subsidiaries (Note 6)		13,127			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, 485,740 shares issued (in series) and outstanding, (886,140 at December 31, 2009) at liquidation preference		3,379,777			3,399,777
Common Shares of beneficial interest, $0.10 par value, 650,000,000 shares authorized, 169,174,859 shares issued and outstanding (168,405,539 at December 31, 2009)		16,919			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		5,513,603			5,680,549
Accumulated deficit		(226,343	)		(153,759	)
Accumulated other comprehensive loss		(11,880	)		(15,002	)
Total Public Storage shareholders’ equity		8,672,076			8,928,407
Equity of permanent noncontrolling interests in subsidiaries (Note 6)		133,060			132,974
Total equity		8,805,136			9,061,381
Total liabilities and equity	$	9,651,410		$	9,805,645

See accompanying notes.

PUBLIC STORAGE

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009

Revenues:
Self-storage facilities	$	389,402		$	377,430		$	1,127,638		$	1,118,750
Ancillary operations		26,588			27,800			78,823			81,741
Interest and other income		6,775			6,857			22,023			22,006
		422,765			412,087			1,228,484			1,222,497
Expenses:
Cost of operations:
Self-storage facilities		127,672			120,975			388,086			378,259
Ancillary operations		7,091			7,493			25,060			27,520
Depreciation and amortization		92,648			85,670			262,359			253,844
General and administrative		8,910			8,654			29,068			26,532
Interest expense		7,838			7,289			22,455			22,705
		244,159			230,081			727,028			708,860
Income from continuing operations before equity in earnings of real estate entities, foreign currency exchange gain (loss), gains on disposition of real estate investments, gain on early retirement of debt and asset impairment charges		178,606			182,006			501,456			513,637
Equity in earnings of real estate entities		9,043			8,824			27,792			39,033
Foreign currency exchange gain (loss)		55,455			21,429			(28,592	)		19,901
Gains on disposition of real estate investments		-			30,573			396			33,295
Gain on early retirement of debt		-			-			283			4,114
Asset impairment charges		-			-			(1,949	)		-
Income from continuing operations		243,104			242,832			499,386			609,980
Discontinued operations		2,707			1,119			7,518			(7,213	)
Net income		245,811			243,951			506,904			602,767
Net income allocated (to) from noncontrolling interests in subsidiaries:
Based upon income of the subsidiaries		(6,457	)		(6,642	)		(18,551	)		(21,284	)
Based upon repurchases of interests		-			-			-			72,000
Net income allocable to Public Storage shareholders	$	239,354		$	237,309		$	488,353		$	653,483
Allocation of net income to (from) Public Storage shareholders:
Preferred shareholders based on distributions paid	$	57,522		$	58,108		$	174,509		$	174,324
Preferred shareholders based on repurchases		(800	)		-			4,263			(6,218	)
Equity Shares, Series A		-			5,131			5,131			15,393
Equity Shares, Series A based on redemptions		-			-			25,746			-
Restricted share units		426			577			923			1,509
Common shareholders		182,206			173,493			277,781			468,475
	$	239,354		$	237,309		$	488,353		$	653,483
Net income per common share – basic
Continuing operations	$	1.06		$	1.02		$	1.61		$	2.82
Discontinued operations		0.02			0.01			0.04			(0.04	)
	$	1.08		$	1.03		$	1.65		$	2.78
Net income per common share – diluted
Continuing operations	$	1.05		$	1.02		$	1.60		$	2.82
Discontinued operations		0.02			0.01			0.04			(0.04	)
	$	1.07		$	1.03		$	1.64		$	2.78
Basic weighted average common shares outstanding		169,014			168,373			168,766			168,344
Diluted weighted average common shares outstanding		169,977			169,043			169,640			168,681

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
Redemption of cumulative preferred shares (6,600 shares) (Note 7)		(165,000	)		-		800			-			-			(164,200	)		-			(164,200	)
Issuance of cumulative preferred shares (5,800 shares) (Note 7)		145,000			-		(4,784	)		-			-			140,216			-			140,216
Redemption of Equity Shares, Series A (8,377.193 shares) (Note 7)		-			-		(205,366	)		-			-			(205,366	)		-			(205,366	)
Issuance of common shares in connection with share-based compensation (769,320 shares) (Note 9)		-			77		36,525			-			-			36,602			-			36,602
Share-based compensation expense, net of cash compensation in lieu of common shares (Note 9)		-			-		5,879			-			-			5,879			-			5,879
Adjustments of redeemable noncontrolling interests in subsidiaries to liquidation value (Note 6)		-			-		-			(194	)		-			(194	)		-			(194	)
Net income		-			-		-			506,904			-			506,904			-			506,904
Net income allocated to (Note 6):
Redeemable noncontrolling interests in subsidiaries		-			-		-			(695	)		-			(695	)		-			(695	)
Permanent noncontrolling equity interests		-			-		-			(17,856	)		-			(17,856	)		17,856			-
Distributions to equity holders:
Cumulative preferred shares (Note 7)		-			-		-			(174,509	)		-			(174,509	)		-			(174,509	)
Permanent noncontrolling interests in subsidiaries		-			-		-			-			-			-			(17,770	)		(17,770	)
Equity Shares, Series A ($0.6125 per depositary share)		-			-		-			(5,131	)		-			(5,131	)		-			(5,131	)
Holders of unvested restricted share units		-			-		-			(1,194	)		-			(1,194	)		-			(1,194	)
Common shares ($2.25 per share)		-			-		-			(379,909	)		-			(379,909	)		-			(379,909	)
Other comprehensive income (Note 2)		-			-		-			-			3,122			3,122			-			3,122

Balance at September 30, 2010	$	3,379,777		$	16,919	$	5,513,603		$	(226,343	)	$	(11,880	)	$	8,672,076		$	133,060		$	8,805,136

See accompanying notes.

PUBLIC STORAGE

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	For the Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	506,904		$	602,767
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposition of real estate investments, including amounts in discontinued operations		(8,190	)		(39,313	)
Gain on early retirement of debt		(283	)		(4,114	)
Asset impairment charges, including amounts in discontinued operations		2,544			8,205
Depreciation and amortization, including amounts in discontinued operations		262,739			256,108
Distributions received from real estate entities in excess of (less than) equity in earnings of real estate entities		9,585			(2,893	)
Foreign currency exchange loss (gain)		28,592			(19,901	)
Other		19,823			36,670
Total adjustments		314,810			234,762
Net cash provided by operating activities		821,714			837,529
Cash flows from investing activities:
Capital improvements to real estate facilities		(68,628	)		(52,449	)
Construction in process		(11,859	)		(11,029	)
Acquisition of real estate facilities and tenant intangibles (Note 3)		(93,660	)		-
Proceeds from sales of other real estate investments		15,442			10,464
Acquisition of common stock of PS Business Parks		-			(17,825	)
Proceeds from repayments of loan receivable from Shurgard Europe		18,919			-
Net purchases of marketable securities		(104,828	)		-
Other investing activities		4,572			(4,321	)
Net cash used in investing activities		(240,042	)		(75,160	)
Cash flows from financing activities:
Principal payments on notes payable		(57,575	)		(5,601	)
Repurchases of senior unsecured notes payable		-			(109,622	)
Net proceeds from the issuance of common shares		36,602			1,899
Issuance of cumulative preferred shares		140,216			-
Repurchases of cumulative preferred shares		(164,200	)		(17,535	)
Repurchases of Equity Shares, Series A		(205,366	)		-
Repurchases of permanent noncontrolling equity interests		-			(153,000	)
Distributions paid to Public Storage shareholders		(560,743	)		(468,507	)
Distributions paid to redeemable noncontrolling interests		(884	)		(976	)
Distributions paid to permanent noncontrolling equity interests		(17,770	)		(19,304	)
Net cash used in financing activities		(829,720	)		(772,646	)
Net decrease in cash and cash equivalents		(248,048	)		(10,277	)
Net effect of foreign exchange translation on cash		(2,262	)		504
Cash and cash equivalents at the beginning of the period		763,789			680,701
Cash and cash equivalents at the end of the period	$	513,479		$	670,928

See accompanying notes.

PUBLIC STORAGE

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

(Continued)

	For the Nine Months Ended September 30,
	2010			2009
Supplemental schedule of non cash investing and financing activities:

Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation	$	129		$	(1,440	)
Investment in real estate entities		(4,326	)		(18,191	)
Loan receivable from Shurgard Europe		27,405			(19,422	)
Accumulated other comprehensive loss		(25,470	)		39,557

Adjustments of redeemable noncontrolling interests to fair values:
Accumulated deficit		(194	)		(256	)
Redeemable noncontrolling interests		194			256

Real estate acquired in exchange for assumption of notes payable		(131,698	)		-
Notes payable assumed in connection with the acquisition of real estate		131,698			-

Real estate disposed of in exchange for other asset		-			2,941
Other asset received in exchange for disposal of real estate		-			(2,941	)

See accompanying notes.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

1.	Description of the Business

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

At September 30, 2010, we had direct and indirect equity interests in 2,044 self-storage facilities (with approximately 129.2 million net rentable square feet) 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 has an ownership interest in 188 self-storage facilities (with approximately 10.1 million net rentable square feet) located in Europe (116 facilities with approximately 6.5 million net rentable square feet are owned directly, and the remaining 72 facilities with approximately 3.6 million net rentable square feet are owned by two joint ventures that Shurgard Europe has a 20% equity interest in), and manages our London, England facility, all operating under the “Shurgard Storage Centers” name. We also have direct and indirect equity interests in approximately 23 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 and nine months ended September 30, 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 September 30, 2009 financial statements have been reclassified to conform to the September 30, 2010 presentation, as a result of discontinued operations.

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”).

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

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

The accounts of the entities we control, and VIE’s that we are the primary beneficiary of, 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 September 30, 2010, the Company and the Subsidiaries own a total of 2,033 real estate facilities included in continuing operations, consisting of 2,025 self-storage facilities in the U.S., one self-storage facility in London, England and seven commercial facilities in the U.S.

At September 30, 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 September 30, 2010, PSB owns approximately 21.1 million rentable square feet of commercial space, Shurgard Europe has interests in 188 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, for the three quarters ended September 30, 2010, and we expect to meet these tests for the rest of 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 September 30, 2010.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Real Estate Facilities

Real estate facilities are recorded at cost. Costs associated with the development, construction, renovation and improvement of properties are capitalized. Interest, property taxes and other costs associated with development incurred during the construction period are capitalized as building cost. Costs associated with the sale of real estate facilities or interests in real estate investments are expensed as incurred. Expenditures for repairs and maintenance are expensed when incurred. Depreciation expense is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which generally range from 5 to 25 years.

Acquisitions of operating self-storage facilities are accounted for under the provisions of Codification Section 805, “Business Combinations.” The net acquisition cost includes cash paid to the seller as well as the fair value of any mortgage debt assumed. In the case of multiple facility acquisitions, the aggregate acquisition cost is allocated to each facility based upon the relative estimated fair value of each facility. Any difference between the acquisition cost and the fair value of the real estate facilities is recorded as goodwill. The acquisition cost of each facility is allocated to the underlying land, buildings, and self-storage tenants in place (“Tenant Intangibles”) of each facility, based upon the relative estimated fair values. Significant judgment is used to estimate fair values in recording our business combinations, and the valuation process utilizes significant unobservable inputs, which are “Level 3” inputs as the term is defined in FASB Codification Section 820-10-35-52. Legal services, due diligence, transfer taxes, and other internal and external transaction costs associated with acquisitions are expensed as incurred.

Other Assets

Other assets primarily consist of prepaid expenses, accounts receivable, interest receivable, and restricted cash. During the nine months ended September 30, 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 nine months ended September 30, 2010.

Accrued and Other Liabilities

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

Financial Instruments

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

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

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Marketable securities consist of short-term investments in high-grade corporate securities rated A1 by Standard and Poor’s. Because we have the positive intent and ability to hold these securities to maturity, the securities are stated at amortized cost and the related unrecognized gains and losses are excluded from earnings and other comprehensive income. The difference between interest income that is imputed using the effective interest method and the actual note interest collected is recorded as an adjustment to the marketable security balance; marketable securities were decreased $354,000 during the nine months ended September 30, 2010 in applying the effective interest method. The amortized cost, gross unrecognized holding losses, and fair value of our marketable securities were $102,131,000, ($16,000) and $102,115,000, respectively, at September 30, 2010. The characteristics of the marketable securities and comparative metrics utilized in our evaluation represent significant observable inputs, which are “Level 2” inputs as the term is defined in FASB Codification Section 820-10-35-47. All of our marketable securities have a maturity of one year or less as of September 30, 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 nine months ended September 30, 2010, we had no other-than-temporary impairment losses.

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 September 30, 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 $612,297,000 at September 30, 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 September 30, 2010 and December 31, 2009.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Intangible Assets

Our tenant intangibles are finite-lived intangible assets representing primarily the estimated value of the tenants in place (“Tenant Intangibles”) 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 individual real estate facilities where the related Tenant Intangibles had not been fully amortized at each applicable date.

At September 30, 2010, our Tenant Intangibles have a net book value of $26,980,000 ($19,446,000 at December 31, 2009). Accumulated amortization totaled $18,971,000 at September 30, 2010 ($14,688,000 at December 31, 2009), and amortization expense of $5,764,000 and $1,145,000 was recorded for the three months ended September 30, 2010 and 2009, respectively, and $9,078,000 and $4,434,000 was recorded for the nine months ended September 30, 2010 and 2009, respectively. During the nine months ended September 30, 2010, our Tenant Intangibles were increased by $16,810,000 in connection with the acquisition of 38 self-storage facilities (Note 3) and were reduced by $198,000 in connection with the termination of a ground lease.

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 September 30, 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 September 30, 2010.

Evaluation of Asset Impairment

We evaluate our real estate, tenant intangible assets, 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 nine months ended September 30, 2010, we recorded impairment charges totaling $2,544,000, comprised of $1,735,000 in real estate facilities (Note 3), of which $397,000 is reflected under “discontinued operations” on our condensed consolidated statements of income, $611,000 in other assets, and $198,000 in intangible assets related to a ground lease and which is reflected under “discontinued operations” on our condensed consolidated statements of income. During the nine months ended September 30, 2009, we recorded an impairment charge of $8,205,000, reflected under “discontinued operations” on our condensed consolidated statements of income, in connection with an eminent domain proceeding at one of our facilities. 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 September 30, 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.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

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

Foreign Currency Exchange Translation

The local currency is the functional currency for the foreign operations we have an interest in. Assets and liabilities included on our consolidated balance sheets, including our equity investment in, and our loan receivable from, Shurgard Europe, are translated at end-of-period exchange rates, while revenues, expenses, and equity in earnings in the related real estate entities, are translated at the average exchange rates in effect during the period. The Euro, which represents the functional currency used by a majority of the foreign operations we have an interest in, was translated at an end-of-period exchange rate of approximately 1.361 U.S. Dollars per Euro at September 30, 2010 (1.433 at December 31, 2009), and average exchange rates of 1.289 and 1.428 for the three months ended September 30, 2010 and 2009, respectively, and 1.316 and 1.365 for the nine months ended September 30, 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.

Fair Value Accounting

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

Loan Receivable from Shurgard Europe

As of September 30, 2010, we had a €378.7 million loan receivable from Shurgard Europe totaling $515,379,000 (€391.9 million totaling $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.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

For the three and nine months ended September 30, 2010, we recorded interest income of approximately $5,946,000 and $18,209,000, respectively, related to the loan. For the three and nine months ended September 30, 2009, we recorded interest income of approximately $6,038,000 and $17,012,000, 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. We received $18,919,000 (€13,200,000) in principal repayments on the loan during the nine months ended September 30, 2010.

Although there can be no assurance, we believe that Shurgard Europe has sufficient liquidity and collateral, and we have sufficient creditor rights, such that credit risk relating to the loan 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.

Other Comprehensive Income

Other comprehensive income consists primarily of foreign currency translation adjustments. 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:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
	(Amounts in thousands)						(Amounts in thousands)
Net income	$	245,811		$	243,951		$	506,904		$	602,767
Other comprehensive income (loss):
Aggregate foreign currency translation adjustments for the period		78,826			27,244			(25,470	)		39,557
Less: foreign currency translation adjustments reflected in net income as “Foreign currency (gain) loss” (a)		(55,455	)		(21,429	)		28,592			(19,901	)
Other comprehensive income for the period		23,371			5,815			3,122			19,656
Total comprehensive income	$	269,182		$	249,766		$	510,026		$	622,423

(a)

Included in the foreign currency (gain) loss for the three and nine months ended September 30, 2010 is a realized gain of $0.5 million in connection with the repayment on September 30, 2010 by Shurgard Europe of EUR12.1 million of the their loan payable to us. This gain represents the difference between the spot rates on the date the amount was initially funded by us (1.32 U.S. Dollars per Euro) and the repayment date (1.36 U.S. Dollars per Euro).

Discontinued Operations

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

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Included in discontinued operations are the historical operations of (i) two facilities we currently own that are subject to eminent domain proceedings, (ii) a land-leased facility that was disposed of in the nine months ended September 30, 2010 when the land lease expired, (iii) our truck rental and containerized storage operations which ceased in 2009, and (iv) certain other self-storage facilities that were disposed of in 2009 in connection with eminent domain proceedings. In addition to revenues and expenses of these operating units prior to disposal, discontinued operations is comprised primarily of $2,707,000 in gains on disposition of real estate facilities for the three months ended September 30, 2010 and $7,794,000 and $6,018,000 in gains on disposition of real estate facilities for the nine months ended September 30, 2010 and 2009, respectively, a $595,000 impairment charge on real estate and intangible assets incurred in the nine months ended September 30, 2010, a $8,205,000 impairment charge on intangible assets incurred at a discontinued facility and $3,500,000 in truck disposal expenses in the nine months ended September 30, 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 nine months ended September 30, 2010 also includes $25.7 million, representing the excess of cash paid to redeem the securities over the original issuance proceeds. We redeemed these securities on April 15, 2010.

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

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

The following table reflects the components of the calculations of our basic and diluted net income per share, basic and diluted net 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:

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
	(Amounts in thousands)

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

Net income allocable to common shareholders	$	182,206		$	173,493		$	277,781		$	468,475

Eliminate: Discontinued operations allocable to common shareholders		(2,707	)		(1,119	)		(7,518	)		7,213
Net income from continuing operations allocable to common shareholders	$	179,499		$	172,374		$	270,263		$	475,688

Weighted average common shares and equivalents outstanding:
Basic weighted average common shares outstanding		169,014			168,373			168,766			168,344
Net effect of dilutive stock options - based on treasury stock method using average market price		963			670			874			337
Diluted weighted average common shares outstanding		169,977			169,043			169,640			168,681

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 any effect on our financial statements.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

3.	Real Estate Facilities

Activity in real estate facilities is as follows:

	Nine Months Ended September 30, 2010
	(Amounts in thousands)
Operating facilities, at cost:
Beginning balance	$	10,292,955
Capital improvements		68,628
Acquisition of real estate facilities		208,765
Newly developed facilities opened for operations		7,088
Disposition of real estate facilities		(16,665	)
Impairment of real estate facilities		(1,735	)
Impact of foreign exchange rate changes		(169	)
Ending balance		10,558,867
Accumulated depreciation:
Beginning balance		(2,734,449	)
Depreciation expense		(250,109	)
Disposition of real estate facilities		9,413
Impact of foreign exchange rate changes		40
Ending balance		(2,975,105	)
Construction in process:
Beginning balance		3,527
Current development		11,859
Newly developed facilities opened for operations		(7,088	)
Ending balance		8,298
Total real estate facilities at September 30, 2010	$	7,592,060

During the nine months ended September 30, 2010, we acquired 38 operating self-storage facilities (2,358,000 net rentable square feet) from third parties for $225,358,000, consisting of the assumption of mortgage debt with an aggregate fair value of $131,698,000 and $93,660,000 of cash. The aggregate cost was allocated $208,765,000 to real estate facilities, $16,810,000 to intangibles and $217,000 to other liabilities. For the three and nine months ended September 30, 2010, we also incurred $750,000 and $2,384,000, respectively, in legal, due diligence, transfer taxes, and other transaction costs related to the acquisitions. These amounts were included in general and administrative expense on our accompanying condensed consolidated statements of operations.

During the nine months ended September 30, 2010, we completed two expansion projects to existing facilities at an aggregate cost of $7,088,000.

During the nine months ended September 30, 2010, we disposed of real estate facilities in connection with condemnation proceedings and the sale of a commercial facility. Net proceeds with respect to dispositions totaled $15,442,000 and we recorded a gain of $8,190,000 ($396,000 included in “gain on disposition of real estate facilities” and $7,794,000 included in discontinued operations).

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

4.	Investments in Real Estate Entities

The following table sets forth our investments in the real estate entities at September 30, 2010 and December 31, 2009, and our equity in earnings of real estate entities for the three and nine months ended September 30, 2010 and 2009 (amounts in thousands):

	Investments in Real Estate Entities at
	September 30, 2010		December 31, 2009
PSB	$	325,123	$	326,145
Shurgard Europe		268,637		272,345
Other Investments		13,297		13,826
Total	$	607,057	$	612,316



	Equity in Earnings of Real Estate Entities
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2010		2009		2010		2009
PSB	$	5,091	$	4,684	$	16,279	$	30,351
Shurgard Europe		3,485		3,631		10,254		7,239
Other Investments		467		509		1,259		1,443
Total	$	9,043	$	8,824	$	27,792	$	39,033

Included in equity in earnings of real estate entities for the nine months ended September 30, 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 nine months ended September 30, 2010 and 2009, we received cash distributions from our investments in real estate entities totaling $37,377,000 and $36,140,000, respectively.

During the nine months ended September 30, 2010 and 2009, our investment in Shurgard Europe increased by approximately $4,326,000 and $18,191,000, respectively, due to the impact of changes in foreign currency exchange rates. During the three and nine months ended September 30, 2009, our investments in real estate entities increased by $48,118,000 due to (i) $17,825,000 representing our acquisition of an additional 383,333 shares of PSB common stock and (ii) $30,293,000 presented in “gains on disposition of real estate investments” in connection with PSB’s sale of common stock in a public offering described below in “Investment in PSB.”

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 September 30, 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 September 30, 2010 ($56.57 per share of PSB common stock), the shares and units we owned had a market value of approximately $741.5 million as compared to our book value of $325.1 million. We account for our investment in PSB using the equity method.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

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 nine months ended September 30,
Total revenue	$	207,698		$	203,914
Costs of operations		(67,633	)		(65,007	)
Depreciation and amortization		(58,056	)		(64,854	)
General and administrative		(6,980	)		(4,927	)
Other items		2,861			(177	)
Net income	$	77,890		$	68,949

	At September 30, 2010			At December 31, 2009
	(Amounts in thousands)

Total assets (primarily real estate)	$	1,505,316		$	1,564,822
Debt		51,864			52,887
Other liabilities		54,726			46,298
Preferred stock and units		625,339			699,464
Common equity and units		773,387			766,173

Investment in Shurgard Europe

At September 30, 2010, we had a 49% equity investment in Shurgard Europe, which owns 116 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 of Shurgard Europe includes our 49% equity share of Shurgard Europe’s operations, as well as 49% of the interest and trademark license fees received from Shurgard Europe. The following table sets forth our equity in earnings Shurgard Europe:

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
	(Amounts in thousands)

Our 49% equity share of Shurgard Europe’s net loss	$	(2,435	)	$	(2,377	)	$	(7,843	)	$	(9,677	)
Add our 49% equity share of amounts received from Shurgard Europe (a):
Interest on note receivable		5,712			5,801			17,495			16,344
Trademark license fee		208			207			602			572

Total equity in earnings of Shurgard Europe	$	3,485		$	3,631		$	10,254		$	7,239

(a)

In addition to recording our 49% equity share of Shurgard Europe’s operations as equity in earnings of real estate entities, in consolidation we also reclassify 49% of the interest income on our note receivable from Shurgard Europe, and trademark license fees received from Shurgard Europe, from interest and other income to equity in earnings. The remaining 51% of these amounts, which are attributable to the pro-rata share of Shurgard Europe that we do not own, are included in interest and other income.

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.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2010			2009			2010			2009
	(Amounts in thousands)

Self-storage and ancillary revenues	$	59,079		$	59,457		$	173,146		$	164,114
Interest and other income (expense)		66			178			(145	)		371
Self-storage and ancillary cost of operations		(25,020	)		(25,546	)		(73,732	)		(74,929	)
Trademark license fee payable to Public Storage		(423	)		(423	)		(1,228	)		(1,169	)
Depreciation and amortization		(17,880	)		(18,922	)		(54,019	)		(53,734	)
General and administrative		(2,247	)		(1,475	)		(5,903	)		(6,557	)
Interest expense on third party debt		(3,245	)		(3,905	)		(8,696	)		(12,328	)
Interest expense on loan payable to Public Storage		(11,659	)		(11,839	)		(35,704	)		(33,356	)
Income (expenses) from foreign currency exchange		(415	)		466			(845	)		851
Discontinued operations		-			-			-			8
Net loss	$	(1,744	)	$	(2,009	)	$	(7,126	)	$	(16,729	)

Net income allocated to permanent noncontrolling equity interests in subsidiaries (a)		3,225			2,841			8,880			3,019
Net loss allocated to Shurgard Europe	$	(4,969	)	$	(4,850	)	$	(16,006	)	$	(19,748	)

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)


	At September 30, 2010		At December 31, 2009
	(Amounts in thousands)

Total assets (primarily self-storage facilities)	$	1,552,376	$	1,617,579
Total debt to third parties		296,496		328,510
Total debt to Public Storage		515,379		561,703
Other liabilities		79,140		75,074
Equity	$	661,361	$	652,292

(a)

Includes depreciation expense allocated to the permanent noncontrolling equity interests in subsidiaries totaling $3,036,000 and $2,994,000 in the three months ended September 30, 2010 and 2009, respectively, and $9,033,000 and $8,591,000 in the nine months ended September 30, 2010 and 2009, respectively.

Other Investments

At September 30, 2010, the “Other Investments” include an aggregate common equity ownership of approximately 24% in entities that collectively own 19 self-storage facilities at September 30, 2010. 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:

	2010			2009
	(Amounts in thousands)
For the nine months ended September 30,
Total revenue	$	12,522		$	12,512
Cost of operations and other expenses		(4,866	)		(4,776	)
Depreciation and amortization		(1,856	)		(1,515	)
Net income	$	5,800		$	6,221

	At September 30, 2010			At December 31, 2009
	(Amounts in thousands)

Total assets (primarily self-storage facilities)	$	36,648		$	37,386
Total accrued and other liabilities		1,614			876
Total Partners’ equity	$	35,034		$	36,510

5.	Line of Credit and Notes Payable

At September 30, 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 September 30, 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 September 30, 2010). We had no outstanding borrowings on our Credit Agreement at September 30, 2010 or at November 5, 2010. At September 30, 2010, we had undrawn standby letters of credit, which reduce our borrowing capacity with respect to our line of credit by the amount of the letters of credit, totaling $18,127,000 ($18,270,000 at December 31, 2009).

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

The carrying amounts of our notes payable at September 30, 2010 and December 31, 2009 consist of the following (dollar amounts in thousands):

	September 30, 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 $479 of unamortized premium at September 30, 2010 and $1,889 at December 31, 2009)		103,796		105,206

Secured Notes Payable:

4.8% average effective rate fixed rate mortgage notes payable, secured by 100 real estate facilities with a net book value of approximately $624 million at September 30, 2010 and stated note rates between 4.95% and 8.00%, maturing at varying dates between January 2011 and September 2028 (carrying amount includes $7,457 of unamortized premium at September 30, 2010 and $3,983 at December 31, 2009)		299,262		227,223

Total notes payable	$	589,518	$	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.

As described in Note 3, during the nine months ended September 30, 2010, we assumed mortgage debt in connection with the acquisition of real estate facilities. These mortgage notes were recorded at their estimated fair value of approximately $131,698,000 with an estimated average market rate of approximately 3.4% as compared to the actual assumed note balances totaling $126,140,000 with an average contractual interest rate of 5.0%. This initial premium of $5,558,000 is being amortized over the remaining term of the mortgage notes using the effective interest method. Following the acquisition of these properties, we prepaid $51,497,000 of these mortgage notes, recording a gain on repayment of debt totaling $283,000, based upon the difference between approximately $51,214,000 paid and the related net book value (which included $283,000 in note premium) of these loans.

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.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Our notes payable and our Credit Agreement each have various customary restrictive covenants, all of which have been met at September 30, 2010. At September 30, 2010, approximate principal maturities of our notes payable are as follows (amounts in thousands):

	Unsecured Notes Payable			Secured Notes Payable			Total
2010 (remainder)	$	263		$	4,842		$	5,105
2011		103,533			46,339			149,872
2012		-			70,761			70,761
2013		186,460			79,126			265,586
2014		-			49,112			49,112
Thereafter		-			49,082			49,082
	$	290,256		$	299,262		$	589,518
Weighted average effective rate		5.8	%		4.9	%		5.3	%

We incurred interest expense (including interest capitalized as real estate totaling $320,000 and $547,000, respectively, for the nine months ended September 30, 2010 and 2009) with respect to our notes payable, capital leases and line of credit aggregating $22,775,000 and $23,252,000 for the nine months ended September 30, 2010 and 2009, respectively. These amounts were comprised of $25,986,000 and $26,065,000 in cash paid during the nine months ended September 30, 2010 and 2009, respectively, less $3,211,000 and $2,813,000 in amortization of premium, respectively.

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 September 30, 2010, the Redeemable Noncontrolling Interests in Subsidiaries represent equity interests in three entities that own in aggregate 14 self-storage facilities. During the nine months ended September 30, 2010 and 2009, these interests were increased by $194,000 and $256,000, 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 and nine months ended September 30, 2010, we allocated a total of $238,000 and $695,000, respectively, of income to these interests. During the same periods in 2009, we allocated a total of $247,000 and $753,000, respectively, of income to these interests. During the nine months ended September 30, 2010 and 2009, we paid distributions to these interests totaling $884,000 and $976,000, respectively.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Permanent Noncontrolling Interests in Subsidiaries

At September 30, 2010, the Permanent Noncontrolling Interests in Subsidiaries represent (i) equity interests in 28 entities that own an aggregate of 93 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 $33,060,000 at September 30, 2010 ($32,974,000 at December 31, 2009). During the three and nine months ended September 30, 2010, we allocated a total of $4,406,000 and $12,418,000, respectively, in income to these interests. During the same periods in 2009, we allocated a total of $4,582,000 and $12,888,000, respectively, in income to these interests. During the nine months ended September 30, 2010 and 2009, we paid distributions to these interests totaling $12,332,000 and $11,661,000, respectively.

Preferred Partnership Interests

At September 30, 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. On October 25, 2010, we repurchased all the Series J preferred units for $100.4 million plus accrued distributions of $492,000.

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 and nine months ended September 30, 2010, we allocated a total of $1,813,000 and $5,438,000, respectively, in income to these interests based upon distributions paid. During the same periods in 2009, we allocated a total of $1,813,000 and $7,643,000, respectively, in income to these interests based upon distributions paid.

7.	Public Storage Shareholders’ Equity

Cumulative Preferred Shares

At September 30, 2010 and December 31, 2009, we had the following series of Cumulative Preferred Shares of beneficial interest outstanding:

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

					At September 30, 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
Series W	10/6/08		6.500	%		5,300		132,500		5,300		132,500
Series X	11/13/08		6.450	%		4,800		120,000		4,800		120,000
Series Y	1/2/09		6.850	%		350,900		8,772		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
Series O	4/15/15		6.875	%		5,800		145,000		-		-
Total Cumulative Preferred Shares						485,740	$	3,379,777		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 September 30, 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.

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.

On April 13, 2010, we issued 5,800,000 depositary shares each representing 1/1,000 of our 6.875% Cumulative Preferred Shares, Series O for gross proceeds of $145,000,000.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

On May 18, 2010, we redeemed our remaining Series V Cumulative Preferred Shares at par value plus accrued dividends.

On August 3, 2010, we repurchased 400,000 shares of our 6.850% Cumulative Preferred Shares Series Y, at a total cost of $9,200,000. The carrying value of the shares repurchased totaled $10 million and exceeded the aggregate repurchase cost of $9.2 million by $0.8 million. For purposes of determining net income per share, income allocated to our preferred shareholders was reduced by the $0.8 million for the three months ended September 30, 2010.

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.

On October 4, 2010, we called for redemption our Series B Cumulative Preferred Shares, at par. The aggregate redemption amount, before payment of accrued dividends, to be paid on November 5, 2010, is $108,750,000. In applying EITF D-42 to this redemption, we will allocate $3,626,000 of income from our common shareholders to the holders of our Preferred Shares, representing the excess of the amount paid over the initial issuance proceeds, in the quarter ending December 31, 2010.

On October 7, 2010, we issued 5,000,000 depositary shares (including the subsequent exercise, in part, of the underwriter’s over-allotment option) each representing 1/1,000 of a 6.500% Cumulative Preferred Share of Beneficial Interest, Series P, for gross proceeds of $125,000,000.

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 for aggregate redemption amount of $205.4 million.

During each of the three months ended March 31, 2010 and 2009, June 30, 2009 and September 30, 2009, we allocated income and paid quarterly distributions to the holders of the Equity Shares, Series A totaling $5.1 million ($0.6125 per share) based on 8,377,193 weighted average depositary shares outstanding. Net income allocated to the Equity Shares, Series A for the nine months ended September 30, 2010 also includes $25.7 million ($3.07 per share), representing the excess of cash paid to redeem the securities over the original issuance proceeds. As a result of the redemption on April 15, 2010, no further distributions will be paid for the period subsequent to March 31, 2010.

Equity Shares, Series AAA

On August 31, 2010, we retired all outstanding shares of Equity Shares, Series AAA (“Equity Shares AAA”) outstanding. At December 31, 2009, we had 4,289,544 Equity Shares AAA outstanding with a carrying value of $100,000,000. The Equity Shares AAA ranked on parity with our common shares and junior to our Senior Preferred Shares with respect to general preference rights, and had a liquidation amount equal to 120% of the amount distributed to each common share. 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 2010 and 2009, we paid quarterly distributions to the holder of the Equity Shares, Series AAA of $0.5391 per share for each of the quarters ended March 31 and June 30. We also paid distributions of $0.5391 per share for the quarter ended September 30, 2009. As a result of the retirement on August 31, 2010, no further distributions will be paid for the period subsequent to June 30, 2010. For all periods presented, the Equity Shares, Series AAA and related dividends are eliminated in consolidation as the shares are held by one of our wholly-owned subsidiaries.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Dividends

The unaudited characterization of dividends for Federal income tax purposes is made based upon earnings and profits of the Company, as defined by the Internal Revenue Code. Common share dividends including amounts paid to our restricted share unitholders totaled $135.7 million ($0.80 per share) and $93.0 million ($0.55 per share), for the three months ended September 30, 2010 and 2009, respectively, and $381.1 million ($2.25 per share) and $278.8 million ($1.65 per share), for the nine months ended September 30, 2010 and 2009, respectively. As noted above, we redeemed all of our outstanding shares of Equity Shares, Series A on April 15, 2010 and no further distributions will be paid subsequent to March 31, 2010. Equity Shares, Series A dividends totaled $5.1 million ($0.6125 per share) for the three months ended March 31, 2010, and $5.1 million ($0.6125 per share) and $15.4 million ($1.838 per share) for the three and nine months ended September 30, 2009, respectively. Preferred share dividends totaled $57.5 million and $58.1 million for the three months ended September 30, 2010 and 2009, respectively, and $174.5 million and $174.3 million for the nine months ended September 30, 2010 and 2009, respectively.

8.	Related Party Transactions

Mr. Hughes, the Company’s Chairman of the Board of Trustees, and his family (collectively the “Hughes Family”) have ownership interests in, and operate approximately 51 self-storage facilities in Canada using the “Public Storage” brand name (“PS Canada”) pursuant to a royalty-free trademark license agreement with the Company. We currently do not own any interests in these facilities nor do we own any facilities in Canada. The Hughes Family owns approximately 16.8% of our common shares outstanding at September 30, 2010. We have a right of first refusal to acquire the stock or assets of the corporation that manages the 51 self-storage facilities in Canada, if the Hughes Family or the corporation agrees to sell them. However, we have no interest in the operations of this corporation, we have no right to acquire this stock or assets unless the Hughes Family decides to sell and we receive no benefit from the profits and increases in value of the Canadian self-storage facilities.

We reinsure risks relating to loss of goods stored by tenants in the self-storage facilities in Canada. During the nine months ended September 30, 2010 and 2009, we received $460,000 and $479,000 (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.

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

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

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 the three and nine months ended September 30, 2010, we recorded $825,000 and $2,250,000, respectively, in stock option compensation expense related to options granted after January 1, 2002, as compared to $900,000 and $2,400,000 for the same periods in 2009.

A total of 160,000 stock options were granted during the nine months ended September 30, 2010, 706,151 shares were exercised, and 41,625 shares were forfeited. A total of 3,107,892 stock options were outstanding at September 30, 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 nine months ended September 30, 2010, 118,864 restricted share units were granted, 60,319 restricted share units were forfeited and 100,940 restricted share units vested. This vesting resulted in the issuance of 63,169 common shares. In addition, cash compensation totaling $2,660,000 was paid to employees in lieu of 37,771 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.

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

At September 30, 2010, approximately 505,959 restricted share units were outstanding (548,354 at December 31, 2009). A total of $2,274,000 and $6,652,000 in restricted share unit expense was recorded for the three and nine months ended September 30, 2010, respectively, as compared to $2,460,000 and $7,053,000 for the same periods in 2009. 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 $24,000 and $363,000 in related payroll taxes we incurred in the three and nine months ended September 30, 2010, respectively, as compared to $10,000 and $253,000 for the same periods in 2009.

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

10. Segment Information

Our reportable segments reflect significant operating activities that are evaluated separately by management, and are organized based upon their operating characteristics. Each of our segments is evaluated by management based upon net segment income. Net segment income represents net income in conformity with GAAP and our significant accounting policies as denoted in Note 2. We have adjusted the classification of the “Presentation of Segment Information” below with respect to the three and nine months ended September 30, 2009 to be consistent with our current segment definition.

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

Domestic Self-Storage Segment

The Domestic Self-Storage Segment comprises our domestic self-storage rental operations, and is our predominant segment. It includes the operations of the 2,026 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 September 30, 2010, the assets of the Domestic Self-Storage segment are comprised principally of our self-storage facilities with a book value of $7.6 billion ($7.6 billion at December 31, 2009), Tenant Intangibles with a book value of approximately $27.0 million ($19.4 million at December 31, 2009), and the Other Investments with a net book value of $13.3 million ($13.8 million at December 31, 2009). Substantially all of our other assets totaling $100.9 million, and our accrued and other liabilities totaling $243.6 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, under the direction of Public Storage and the institutional investor which owns a 51% equity interest in Shurgard Europe, makes the financing, capital allocation, and other significant decisions for this operation. The Europe Self-Storage segment presentation includes our equity share of Shurgard Europe’s operations, the interest and other income received from Shurgard Europe, as well as specific general and administrative expense, disposition gains, and foreign currency exchange gains and losses that management considers in evaluating our investment in Shurgard Europe. At September 30, 2010, our condensed consolidated balance sheet includes an investment in Shurgard Europe with a book value of $268.6 million ($272.3 million at December 31, 2009) and a loan receivable from Shurgard Europe totaling $515.4 million ($561.7 million at December 31, 2009).

PUBLIC STORAGE

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(Unaudited)

Commercial Segment

The Commercial segment comprises our investment in PSB, a self-managed REIT 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 September 30, 2010, the assets of the Commercial segment are comprised principally of our investment in PSB which has a book value of $325.1 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):

For the three months ended September 30, 2010

	Domestic Self-Storage		Europe Self-Storage		Commercial		Other Items Not Allocated to Segments		Total Consolidated
	(Amounts in thousands)
Revenues:
Self-storage facilities	$	389,402	$	-	$	-	$	-	$	389,402
Ancillary operations		-		-		3,496		23,092		26,588
Interest and other income		-		6,164		-		611		6,775
		389,402		6,164		3,496		23,703		422,765

Expenses:
Cost of operations:
Self-storage facilities		127,672		-		-		-		127,672
Ancillary operations		-		-		1,500		5,591		7,091
Depreciation and amortization		91,993