Edgar Filing: Public Storage

ps10q_1q12.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, 2012

[ ] 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 2, 2012:

Common Shares of beneficial interest, $.10 par value per share – 171,489,939 shares

PUBLIC STORAGE

INDEX


PART I	FINANCIAL INFORMATION	Pages

Item 1.	Financial Statements (Unaudited)

	Balance Sheets at March 31, 2012 and December 31, 2011	1

	Statements of Income for the Three Months Ended March 31, 2012 and 2011	2

	Statements of Comprehensive Income for the Three Months Ended March 31, 2012 and 2011	3

	Statement of Equity for the Three Months Ended March 31, 2012	4

	Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011	5 - 6

	Condensed Notes to Financial Statements	7 - 27

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28 - 54

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

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56 – 57

Item 6.	Exhibits	57

PUBLIC STORAGE

BALANCE SHEETS

(Amounts in thousands, except share data)

	March 31, 2012			December 31, 2011
ASSETS	(Unaudited)

Cash and cash equivalents	$	620,079		$	139,008
Real estate facilities, at cost:
Land		2,823,255			2,811,515
Buildings		8,008,921			7,966,061
		10,832,176			10,777,576
Accumulated depreciation		(3,483,067	)		(3,398,379	)
		7,349,109			7,379,197

Investment in unconsolidated real estate entities		723,528			714,627
Goodwill and other intangible assets, net		211,278			209,833
Loans receivable from unconsolidated real estate entities		414,833			402,693
Other assets		87,485			87,204
Total assets	$	9,406,312		$	8,932,562

LIABILITIES AND EQUITY

Notes payable	$	372,979		$	398,314
Preferred shares called for redemption (Note 8)		476,634			-
Accrued and other liabilities		212,766			210,966
Total liabilities		1,062,379			609,280

Redeemable noncontrolling interests		-			12,355

Commitments and contingencies (Note 12)

Equity:
Public Storage shareholders:
Cumulative Preferred Shares of beneficial interest, $0.01 par value, 100,000,000 shares authorized, 128,018 shares issued (in series) and outstanding, (475,000 at December 31, 2011) at liquidation preference		3,200,450			3,111,271
Common Shares of beneficial interest, $0.10 par value, 650,000,000 shares authorized, 170,449,508 shares issued and outstanding (170,238,805 at December 31, 2011)		17,045			17,024
Paid-in capital		5,413,151			5,442,506
Accumulated deficit		(296,969	)		(259,578	)
Accumulated other comprehensive loss		(11,950	)		(23,014	)
Total Public Storage shareholders’ equity		8,321,727			8,288,209
Permanent noncontrolling interests		22,206			22,718
Total equity		8,343,933			8,310,927
Total liabilities and equity	$	9,406,312		$	8,932,562

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2012			2011

Revenues:
Self-storage facilities	$	407,688		$	385,008
Ancillary operations		29,276			26,915
Interest and other income		5,655			7,768
		442,619			419,691
Expenses:
Cost of operations:
Self-storage facilities		138,974			135,327
Ancillary operations		9,518			8,914
Depreciation and amortization		86,938			88,511
General and administrative		16,405			14,235
Interest expense		5,334			6,984
		257,169			253,971
Income from continuing operations before equity in earnings of unconsolidated real estate entities, foreign currency exchange gain, and gain on real estate sales		185,450			165,720
Equity in earnings of unconsolidated real estate entities		9,115			13,716
Foreign currency exchange gain		12,157			31,252
Gain on real estate sales		-			198
Income from continuing operations		206,722			210,886
Discontinued operations		-			(318	)
Net income		206,722			210,568
Net income allocated to noncontrolling interests		(870	)		(4,460	)
Net income allocable to Public Storage shareholders	$	205,852		$	206,108
Allocation of net income to Public Storage shareholders:
Preferred shareholders based on distributions paid	$	55,095		$	57,617
Preferred shareholders based on redemptions		24,900			-
Restricted share units		514			432
Common shareholders		125,343			148,059
	$	205,852		$	206,108
Net income per common share – basic
Continuing operations	$	0.74		$	0.87
Discontinued operations		-			-
	$	0.74		$	0.87
Net income per common share – diluted
Continuing operations	$	0.73		$	0.87
Discontinued operations		-			-
	$	0.73		$	0.87
Basic weighted average common shares outstanding		170,309			169,315
Diluted weighted average common shares outstanding		171,415			170,382

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

	Three Months Ended March 31,
	2012			2011

Net income	$	206,722		$	210,568
Other comprehensive income:
Aggregate foreign currency translation adjustments for the period		23,221			46,347
Adjust for foreign currency translation gain recognized during the period		(12,157	)		(31,252	)
Other comprehensive income for the period		11,064			15,095
Total comprehensive income		217,786			225,663
Comprehensive income allocated to noncontrolling interests:
Based upon income of the subsidiaries		(870	)		(4,460	)
Comprehensive income allocable to Public Storage Shareholders	$	216,916		$	221,203

See accompanying notes.

PUBLIC STORAGE

STATEMENT OF EQUITY

(Amounts in thousands, except share data)

(Unaudited)

	Cumulative Preferred Shares			Common Shares		Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total Public Storage Shareholders’ Equity			Equity of Permanent Noncontrolling Interests			Total Equity
Balance at December 31, 2011	$	3,111,271		$	17,024	$	5,442,506		$	(259,578	)	$	(23,014	)	$	8,288,209		$	22,718		$	8,310,927
Issuance of cumulative preferred shares (36,900,000 shares) (Note 8)		922,500			-		(29,330	)		-			-			893,170			-			893,170
Redemption of cumulative preferred shares (33,332,833 shares) (Note 8)		(833,321	)		-		-			-			-			(833,321	)		-			(833,321	)
Issuance of common shares in connection with share-based compensation (210,703 shares) (Note 10)		-			21		9,701			-			-			9,722			-			9,722
Share-based compensation expense, net of cash paid in lieu of common shares (Note 10)		-			-		(1,502	)		-			-			(1,502	)		-			(1,502	)
Acquisition of redeemable noncontrolling interests (Note 7)		-			-		(7,954	)		-			-			(7,954	)		-			(7,954	)
Decrease in permanent noncontrolling interests in connection with the acquisition of interests in Subsidiaries (Note 7)		-			-		(270	)		-			-			(270	)		(52	)		(322	)
Net income of the Company		-			-		-			206,722			-			206,722			-			206,722
Net income allocated to:
Redeemable noncontrolling interests		-			-		-			(236	)		-			(236	)		-			(236	)
Permanent noncontrolling interests		-			-		-			(634	)		-			(634	)		634			-
Distributions to equity holders:
Cumulative preferred shares (Note 8)		-			-		-			(55,095	)		-			(55,095	)		-			(55,095	)
Permanent noncontrolling interests		-			-		-			-			-			-			(1,094	)		(1,094	)
Common shares and restricted share units ($1.10 per share)		-			-		-			(188,148	)		-			(188,148	)		-			(188,148	)
Other comprehensive income (Note 2)		-			-		-			-			11,064			11,064			-			11,064

Balance at March 31, 2012	$	3,200,450		$	17,045	$	5,413,151		$	(296,969	)	$	(11,950	)	$	8,321,727		$	22,206		$	8,343,933

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	206,722		$	210,568
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on real estate sales and debt retirement, net, including amounts in discontinued operations		-			55
Depreciation and amortization, including amounts in discontinued operations		86,938			88,553
Distributions received from unconsolidated real estate entities in excess of (less than) equity in earnings of unconsolidated real estate entities		1,957			(820	)
Foreign currency exchange gain		(12,157	)		(31,252	)
Other		(3,970	)		(2,285	)
Total adjustments		72,768			54,251
Net cash provided by operating activities		279,490			264,819
Cash flows from investing activities:
Capital improvements to real estate facilities		(14,278	)		(11,874	)
Construction in process		(997	)		(4,087	)
Acquisition of real estate facilities and property intangibles (Note 3)		(41,970	)		(26,196	)
Proceeds from sales of other real estate investments		-			451
Loans to unconsolidated real estate entities		-			(358,877	)
Proceeds from repayments of loans receivable from unconsolidated real estate entities		-			13,430
Maturities of marketable securities		-			102,279
Other investing activities		2,950			347
Net cash used in investing activities		(54,295	)		(284,527	)
Cash flows from financing activities:
Principal payments on notes payable		(24,884	)		(105,535	)
Net proceeds from the issuance of common shares		9,722			11,373
Issuance of cumulative preferred shares		893,170			-
Redemption of cumulative preferred shares		(356,687	)		-
Acquisition of redeemable noncontrolling interests in subsidiaries		(19,900	)		-
Acquisition of permanent noncontrolling interests		(322	)		-
Distributions paid to Public Storage shareholders		(243,243	)		(193,505	)
Distributions paid to noncontrolling interests		(1,739	)		(3,857	)
Net cash provided by (used in) financing activities		256,117			(291,524	)
Net increase (decrease) in cash and cash equivalents		481,312			(311,232	)
Net effect of foreign exchange translation on cash		(241	)		85
Cash and cash equivalents at the beginning of the period		139,008			456,252
Cash and cash equivalents at the end of the period	$	620,079		$	145,105

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

(Continued)

	For the Three Months Ended March 31,
	2012			2011
Supplemental schedule of non-cash investing and financing activities:

Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation	$	(464	)	$	(524	)
Investment in unconsolidated real estate entities		(10,858	)		(14,637	)
Loan receivable from unconsolidated real estate entities		(12,140	)		(31,101	)
Accumulated other comprehensive income		23,221			46,347

Preferred shares called for redemption and reclassified to liabilities		476,634			-
Preferred shares called for redemption and reclassified from equity		(476,634	)		-

Adjustments of redeemable noncontrolling interests to fair values:
Accumulated deficit		-			(153	)
Redeemable noncontrolling interests		-			153

Real estate acquired in connection with elimination of intangible assets		-			(4,738	)
Intangible assets eliminated in connection with acquisition of real estate		-			4,738

See accompanying notes.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

1.	Description of the Business

Public Storage (referred to herein as “the Company”, “we”, “us”, or “our”), a Maryland real estate investment trust, was organized in 1980. Our principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use.

At March 31, 2012, we had direct and indirect equity interests in 2,064 self-storage facilities (with approximately 131 million net rentable square feet) located in 38 states in the U.S. operating under the “Public Storage” name. In Europe, we own one facility in London, England and we have a 49% interest in Shurgard Europe, which owns 188 self-storage facilities (with approximately 10.1 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name. We also have direct and indirect equity interests in approximately 28.9 million net rentable square feet of commercial space located in 11 states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name. At March 31, 2012, we have a 42% interest in PSB.

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

2.	Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as defined in the Financial Accounting Standards Board Accounting Standards Codification (the “Codification”), including the related guidance with respect to interim financial information, and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. We believe that all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation have been reflected in these unaudited interim financial statements. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 due to seasonality and other factors. The accompanying unaudited interim financial statements should be read together with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Certain amounts previously reported in our December 31, 2011 and March 31, 2011 financial statements have been reclassified to conform to the March 31, 2012 presentation, as a result of discontinued operations.

Consolidation and Equity Method of Accounting

The Codification stipulates generally that entities with insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or where the equity holders as a group do not have a controlling financial interest, are considered Variable Interest Entities (“VIE”). We have determined that we have no investments in any VIEs.

We consolidate all entities that we control (these entities, for the period in which the reference applies, are referred to collectively as the “Subsidiaries”), and we eliminate intercompany transactions and balances. We account for our investment in entities that we do not control, but we have significant influence over, using the equity method of accounting (these entities, for the periods in which the reference applies, are referred to collectively as the “Unconsolidated Real Estate Entities”). When we obtain control of entities in which we already own a partial equity interest, we record a gain representing the differential between the book value and fair value of our preexisting partial equity interest. We then commence consolidating the assets, liabilities, and any noncontrolling interests of the entity. All such changes in consolidation status are reflected prospectively.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

When we are the general partner of a partnership, we believe we control the partnership, unless the third-party limited partners can dissolve the partnership or otherwise remove us as general partner without cause, or if the limited partners have the right to participate in substantive decisions of the partnership.

Collectively, at March 31, 2012, the Company and the Subsidiaries own 2,047 self-storage facilities in the U.S., one self-storage facility in London, England and six commercial facilities in the U.S. At March 31, 2012, the Unconsolidated Real Estate Entities are comprised of PSB, Shurgard Europe, as well as two limited partnerships (these two limited partnerships, for the periods in which the reference applies, are referred to collectively as the “Other Investments”). At March 31, 2012, the Other Investments own in aggregate 17 self-storage facilities with 1.0 million net rentable square feet in the U.S.

Use of Estimates

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

Income Taxes

We have elected to be treated as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code. As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) each year, and if we meet certain organizational and operational rules. We believe we will meet these REIT requirements in 2012, and that we have met them for all other periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our merchandise and tenant reinsurance operations are subject to corporate income tax, and such taxes are included in ancillary cost of operations. We also incur income and other taxes in certain states, which are included in general and administrative expense.

We recognize tax benefits of income tax positions that are subject to audit only if we believe it is more likely than not that the position would be sustained (including the impact of appeals, as applicable), assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions. As of March 31, 2012, we had no tax benefits that were not recognized.

Real Estate Facilities

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

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

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

Other Assets

Other assets primarily consist of prepaid expenses, accounts receivable, and restricted cash.

Accrued and Other Liabilities

Accrued and other liabilities consist primarily of trade payables, property tax accruals, tenant prepayments of rents, accrued interest payable, accrued payroll, accrued tenant reinsurance losses, casualty losses, and contingent loss accruals which are accrued when probable and estimable. When it is reasonably possible that a significant unaccrued contingent loss has occurred, we disclose the nature of the potential loss and, if estimable, a range of exposure.

Cash Equivalents and Marketable Securities

We classify as cash equivalents all highly liquid financial instruments such as money market funds with daily liquidity and a rating of at least AAA by Standard and Poor’s, or investment grade (rated A1 by Standard and Poor’s) short-term commercial paper or treasury securities with remaining maturities of three months or less at the date of acquisition. Cash and cash equivalents which are restricted from general corporate use are included in other assets.

Commercial paper with a remaining maturity of more than three months when acquired is included in marketable securities. When at acquisition we have the positive intent and ability to hold these securities to maturity (investments that are “Held to Maturity”), the securities are stated at amortized cost and interest is recorded using the effective interest method.

Fair Value Accounting

As used herein, the term “fair value” is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We prioritize the inputs used in measuring fair value based upon a three-tier fair value hierarchy described in Codification Section 820-10-35.

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

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

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

Currency and Credit Risk

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, loans receivable, and restricted cash. At March 31, 2012, due primarily to our investment in and loan receivable from Shurgard Europe, our operations and financial position are affected by fluctuations in currency exchange rates between the Euro, and to a lesser extent, other European currencies, against the U.S. Dollar.

Goodwill and Other Intangible Assets

Intangible assets are comprised of goodwill, acquired tenants in place, leasehold interests in land, and the “Shurgard” tradename.

Goodwill totaled $174.6 million at March 31, 2012 and December 31, 2011. Goodwill has an indeterminate life and is not amortized.

Acquired tenants in place and leasehold interests in land are finite-lived and are amortized relative to the benefit of the tenants in place or the land lease expense to each period. At March 31, 2012, these intangibles have a net book value of $17.8 million ($16.4 million at December 31, 2011). Accumulated amortization totaled $24.1 million at March 31, 2012 and December 31, 2011, and amortization expense of $2.0 million and $3.5 million was recorded for the three months ended March 31, 2012 and 2011, respectively. During the three months ended March 31, 2012, these intangibles were increased by $3.4 million in connection with the acquisition of self-storage facilities (Note 3).

The “Shurgard” tradename, which is used by Shurgard Europe pursuant to a licensing agreement, has a book value of $18.8 million at March 31, 2012 and December 31, 2011. This asset has an indefinite life and, accordingly, is not amortized.

Evaluation of Asset Impairment

Goodwill impairment is evaluated annually by reporting unit. No impairment of goodwill or the Shurgard trade name was identified in our annual evaluation at December 31, 2011, nor were there any indicators of impairment at March 31, 2012. We evaluate our real estate and property related intangibles for impairment on a quarterly basis. If any indicators of impairment are noted, we estimate future undiscounted cash flows to be received from the use of the asset and, if such future undiscounted cash flows are less than carrying value, an impairment charge is recorded for the excess of carrying value over the assets’ estimated fair value. Long-lived assets which we expect to sell or otherwise dispose of prior to the end of their estimated useful lives are stated at the lower of their net realizable value (estimated fair value less cost to sell) or their carrying value.

Impairment charges with respect to continuing operations are included under “asset impairment charges” on our statements of income, and any such charges with respect to discontinued operations are included under “discontinued operations” on our statements of income.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

Revenue and Expense Recognition

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

We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates and historical trends when bills or assessments have not been received from the taxing authorities or such bills and assessments are in dispute. If these estimates are incorrect, the timing and amount of expense recognition could be incorrect. 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 in which we have an interest. Assets and liabilities related to foreign operations are translated from the functional currency into U.S. Dollars at the exchange rates at the respective financial statement date, while revenues, expenses, and equity in earnings are translated at the average exchange rates during the respective period. The Euro, which is the functional currency of a majority of the foreign operations we have an interest in, was translated at exchange rates of approximately 1.334 U.S. Dollars per Euro at March 31, 2012 (1.295 at December 31, 2011), and average exchange rates of 1.310 and 1.366 for the three months ended March 31, 2012 and 2011, respectively. Cumulative translation adjustments, to the extent not included in cumulative net income, are included in equity as a component of accumulated other comprehensive income (loss).

Comprehensive Income (Loss)

Total comprehensive income for a period represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period, as set forth on our statements of comprehensive income. The foreign currency exchange gains and losses reflected on our statements of income are comprised primarily of foreign currency exchange gains and losses on the Euro-denominated loan to Shurgard Europe.

Discontinued Operations

The net income of real estate facilities or other businesses that have been sold or otherwise disposed of, or that we expect to sell or dispose of within the next year based upon a committed plan of disposal, are reclassified and presented on our income statement for all periods as “discontinued operations.” Discontinued operations for the three months ended March 31, 2011 are comprised primarily of a loss on disposition of real estate.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

Net Income per Common Share

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

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

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

Basic net income per share, basic net income (loss) from discontinued operations per share, and basic net income from continuing operations per share are computed using the weighted average common shares outstanding. Diluted net income per share, diluted net income (loss) from discontinued operations per share, and diluted net income from continuing operations per share are computed using the weighted average common shares outstanding, adjusted for the impact, if dilutive, of stock options outstanding (Note 10).

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

	For the Three Months Ended March 31,
	2012		2011
	(Amounts in thousands)

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

Net income allocable to common shareholders	$	125,343	$	148,059
Eliminate: Discontinued operations allocable to common shareholders		-		318
Net income from continuing operations allocable to common shareholders	$	125,343	$	148,377

Weighted average common shares and equivalents outstanding:
Basic weighted average common shares outstanding		170,309		169,315
Net effect of dilutive stock options - based on treasury stock method		1,106		1,067
Diluted weighted average common shares outstanding		171,415		170,382

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

Recent Accounting Pronouncements and Guidance

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, which clarifies existing fair value measurements principals, and expands certain disclosure requirements. In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment” which allows the consideration of qualitative factors in evaluating impairment to reduce (in certain circumstances) the required complexity of supporting computations. We adopted both of these updates on January 1, 2012, which did not have a material impact on our results of operations, financial condition or disclosures.

In 2011, the FASB issued ASU No’s. 2011-05 and 2011-12, which required that comprehensive income be presented on either our income statement or a separate financial statement, rather than as a note to financial statements, beginning January 1, 2012. We early adopted these statements in the fourth quarter of 2011.

3.	Real Estate Facilities

Activity in real estate facilities is as follows:

	Three Months Ended March 31, 2012
	(Amounts in thousands)
Operating facilities, at cost:
Beginning balance	$	10,777,576
Capital improvements		14,278
Acquisition of real estate facilities		38,570
Current development		997
Impact of foreign exchange rate changes		755
Ending balance		10,832,176
Accumulated depreciation:
Beginning balance		(3,398,379	)
Depreciation expense		(84,397	)
Impact of foreign exchange rate changes		(291	)
Ending balance		(3,483,067	)
Total real estate facilities at March 31, 2012	$	7,349,109

During the three months ended March 31, 2012 we acquired six operating self-storage facilities (532,000 net rentable square feet) for an aggregate cost of $42.0 million of cash. The aggregate cost was allocated $38.6 million to real estate facilities and $3.4 million to intangible assets for acquired tenants in place.

4.	Investments in Real Estate Entities

The following tables sets forth our investments in the Unconsolidated Real Estate Entities at March 31, 2012 and December 31, 2011, and our equity in earnings of the Unconsolidated Real Estate Entities for the three months ended March 31, 2012 and 2011 (amounts in thousands):

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

	Investments in Unconsolidated Real Estate Entities at
	March 31, 2012		December 31, 2011
PSB	$	324,636	$	328,508
Shurgard Europe		388,310		375,467
Other Investments		10,582		10,652
Total	$	723,528	$	714,627

	Equity in Earnings of Unconsolidated Real Estate Entities for the Three Months Ended March 31,
	2012		2011
PSB	$	1,895	$	8,784
Shurgard Europe		6,842		4,527
Other Investments		378		405
Total	$	9,115	$	13,716

During the three months ended March 31, 2012 and 2011, we received cash distributions from our investments in the Unconsolidated Real Estate Entities totaling $11.1 million and $12.9 million, respectively.

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange, which controls an operating partnership. We have a 42% common equity interest in PSB as of March 31, 2012 and December 31, 2011, 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, 2012 ($65.54 per share of PSB common stock), the shares and units we owned had a market value of approximately $859.0 million.

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

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

	2012			2011
	(Amounts in thousands)
For the three months ended March 31,
Total revenue	$	84,894		$	73,690
Costs of operations		(28,172	)		(25,708	)
Depreciation and amortization		(27,299	)		(20,754	)
General and administrative		(2,273	)		(1,570	)
Other items		(5,305	)		(985	)
Net income		21,845			24,673
Net income allocated to preferred unitholders, preferred shareholders and restricted stock unitholders (a)		(17,329	)		(3,210	)
Net income allocated to common shareholders and common unitholders	$	4,516		$	21,463

(a)	Includes EITF D-42 allocations to preferred equity holders of $5.3 million and from preferred equity holders of $7.4 million, during the three months ended March 31, 2012 and 2011, respectively, related to PSB’s redemption of preferred securities.

	March 31, 2012		December 31, 2011
	(Amounts in thousands)

Total assets (primarily real estate)	$	2,121,991	$	2,138,619
Debt		637,874		717,084
Other liabilities		65,194		60,940
Preferred stock and units		669,979		604,129
Common equity and units		748,944		756,466

Investment in Shurgard Europe

For all periods presented, we had a 49% equity investment in Shurgard Europe. On March 2, 2011, Shurgard Europe acquired the 80% interests it did not own in two joint ventures that owned 72 self-storage facilities located in Europe operating under the “Shurgard” name. We and our joint venture partner provided the funding for this acquisition.

Changes in foreign currency exchange rates caused our investment in Shurgard Europe to increase approximately $10.9 million and $14.6 million during the three months ended March 31, 2012 and 2011, respectively.

For the three months ended March 31, 2012 and 2011, we also received interest on the loans due from Shurgard Europe and trademark license fees. For financial statement purposes, 49% of the interest and license fees have been classified as equity in earnings of unconsolidated real estate entities and the remaining 51% as interest and other income, as set forth in the following table:

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

	2012		2011
	(Amounts in thousands)
For the three months ended March 31,
Our 49% equity share of Shurgard Europe’s net income (loss)	$	1,985	$	(2,009	)
Add our 49% equity share of amounts received from Shurgard Europe:
Interest on loans due from Shurgard Europe		4,559		6,289
Trademark license fee		298		247

Total equity in earnings of Shurgard Europe	$	6,842	$	4,527

The following table sets forth selected consolidated financial information of Shurgard Europe. These amounts are based upon all of Shurgard Europe’s balances for all periods (including the consolidated operations of 72 self-storage facilities formerly owned by the joint ventures), rather than our pro rata share, and are based upon our historical acquired book basis.

	2012			2011
	(Amounts in thousands)
For the three months ended March 31,
Self-storage and ancillary revenues	$	60,774		$	62,248
Interest and other income		154			117
Self-storage and ancillary cost of operations		(25,007	)		(26,275	)
Trademark license fee payable to Public Storage		(608	)		(505	)
Depreciation and amortization		(16,711	)		(18,465	)
General and administrative		(2,682	)		(2,696	)
Interest expense on third party debt		(2,522	)		(3,516	)
Interest expense on debt due to Public Storage		(9,304	)		(12,835	)
Income (expenses) from foreign currency exchange		(42	)		643
Net income (loss)	$	4,052		$	(1,284	)

Net income allocated to permanent noncontrolling equity interests		-			(2,816	)
Net income (loss) allocated to Shurgard Europe	$	4,052		$	(4,100	)

Average exchange rates Euro to the U.S. dollar		1.310			1.366

	March 31, 2012			December 31, 2011
	(Amounts in thousands)

Total assets (primarily self-storage facilities)	$	1,459,233		$	1,430,307
Total debt to third parties		267,256			280,065
Total debt to Public Storage		414,833			402,693
Other liabilities		87,031			85,917
Equity		690,113			661,632

Exchange rate at end of period Euro to the U.S. dollar		1.334			1.295

Other Investments

At March 31, 2012, the “Other Investments” include an aggregate common equity ownership of approximately 26% in entities that collectively own 17 self-storage facilities and have no debt.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

The following table sets forth certain condensed financial information (representing all of these entities’ balances and not our pro-rata share) with respect to the Other Investments:

	2012			2011
	(Amounts in thousands)
For the three months ended March 31,
Total revenue	$	3,719		$	3,583
Cost of operations and other expenses		(1,541	)		(1,505	)
Depreciation and amortization		(550	)		(628	)
Net income	$	1,628		$	1,450


	March 31, 2012			December 31, 2011
	(Amounts in thousands)

Total assets (primarily self-storage facilities)	$	30,232		$	31,331
Total accrued and other liabilities		580			1,588
Total Partners’ equity		29,652			29,743

5.	Loans Receivable from Unconsolidated Real Estate Entities

On February 9, 2011, we loaned PSB $121.0 million. The loan had a six-month term and bore interest at a rate of three-month LIBOR plus 0.85% (1.13% per annum for the term of the loan). For the three months ended March 31, 2011, we recorded interest income of approximately $0.2 million related to the loan. The loan was repaid in 2011.

As of March 31, 2012 and December 31, 2011, we had a Euro-denominated loan receivable from Shurgard Europe with a balance of €311.0 million at both periods ($414.8 million at March 31, 2012 and $402.7 million at December 31, 2011), which bears interest at a fixed rate of 9.0% per annum and matures February 15, 2015. Because we expect repayment of this loan in the foreseeable future, foreign exchange rate gains or losses due to changes in exchange rates between the Euro and the U.S. Dollar are recognized in income, under “foreign currency gain.” We have received a total of €80.9 million in principal repayments on this loan since its inception on March 31, 2008.

On February 28, 2011, we provided bridge financing to Shurgard Europe totaling $237.9 million, which it used to acquire its partner’s 80% interests in two affiliated joint ventures on March 2, 2011. This loan bore interest at a fixed rate of 7.0% per annum and was denominated in U.S. Dollars. On June 15, 2011, our joint venture partner in Shurgard Europe effectively purchased 51% of the loan from us for $121.3 million and then the entire loan balance was effectively exchanged for an equity interest in Shurgard Europe.

For the three months ended March 31, 2012 and 2011, we recorded interest income of approximately $4.7 million and $6.5 million, respectively, related to the loans to Shurgard Europe. These amounts reflect 51% of the aggregate interest on the loans, with the other 49% classified as equity in earnings of unconsolidated real estate entities.

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

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

6.	Line of Credit and Notes Payable

On March 21, 2012, we entered a new revolving credit agreement (the “Credit Agreement”), which expires on March 21, 2017. The aggregate limit with respect to borrowings and letters of credit totals $300 million. Amounts drawn on the Credit Agreement bear an annual interest rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 0.925% to LIBOR plus 1.850% depending on our credit ratings (LIBOR plus 0.950% at March 31, 2012). In addition, we are required to pay a quarterly facility fee ranging from 0.125% per annum to 0.400% per annum depending on our credit ratings (0.125% per annum at March 31, 2012). We had no outstanding borrowings on our Credit Agreement at March 31, 2012 or at May 4, 2012. At March 31, 2012, 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 $15.9 million at March 31, 2012 ($18.4 million at December 31, 2011).

The carrying amounts of our notes payable at March 31, 2012 and December 31, 2011 consist of the following (dollar amounts in thousands):

	March 31, 2012		December 31, 2011
Unsecured Notes Payable:

5.875% effective and stated note rate, interest only and payable semi-annually, matures in March 2013	$	186,460	$	186,460

Secured Notes Payable:

5.0% average effective rate mortgage notes payable, secured by 71 real estate facilities with a net book value of approximately $427 million at March 31, 2012 and stated note rates between 4.95% and 7.43%, maturing at varying dates between August 2012 and September 2028 (carrying amount includes $2,014 of unamortized premium at March 31, 2012 and $2,665 at December 31, 2011)		186,519		211,854

Total notes payable	$	372,979	$	398,314

Substantially all of our debt was assumed in connection with the acquisition of real estate. An initial premium or discount is established for any difference between the stated note balance and estimated fair value of the debt assumed. This initial premium or discount is amortized over the remaining term of the debt using the effective interest method.

The notes payable and Credit Agreement have various customary restrictive covenants, all of which we were in compliance with at March 31, 2012.

At March 31, 2012, approximate principal maturities of our notes payable are as follows (amounts in thousands):

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

	Unsecured Notes Payable			Secured Notes Payable			Total
2012 (remainder)	$	-		$	26,835		$	26,835
2013		186,460			78,391			264,851
2014		-			35,127			35,127
2015		-			30,009			30,009
2016		-			10,065			10,065
Thereafter		-			6,092			6,092
	$	186,460		$	186,519		$	372,979
Weighted average effective rate		5.9	%		5.0	%		5.5	%

Cash paid for interest totaled $6.0 million and $8.1 million for the three months ended March 31, 2012 and 2011, respectively. No interest was capitalized as real estate in the three months ended March 31, 2012 ($0.1 million for the same period in 2011).

7.	Noncontrolling Interests

Third party interests in the net assets of the Subsidiaries that can require us to redeem their interests, other than pursuant to a liquidation of the subsidiary, are presented at fair value as “Redeemable Noncontrolling Interests.” We estimate fair value by applying the liquidation provisions of the governing documents to our estimate of the fair value of the underlying net assets (principally real estate assets). Any adjustments recorded due to changes in the fair value of these interests are recorded against retained earnings. All other noncontrolling interests are presented on our balance sheets as a component of equity, “Equity of Permanent Noncontrolling Interests.”

Redeemable Noncontrolling Interests

At December 31, 2011, the Redeemable Noncontrolling Interests represented ownership interests in Subsidiaries that own 14 self-storage facilities. During the three months ended March 31, 2012, we acquired all the outstanding Redeemable Noncontrolling Interests for $19.9 million in cash, of which $11.9 million was recorded as a reduction to redeemable noncontrolling interests and $8.0 million was recorded as a reduction to paid-in capital. During each of the three month periods ended March 31, 2012 and 2011, we allocated a total of $0.2 million of income to these interests and paid distributions to these interests totaling $0.6 million. As of March 31, 2012, we had no outstanding Redeemable Noncontrolling Interests.

Permanent Noncontrolling Interests

At March 31, 2012, the Permanent Noncontrolling Interests have ownership interests in Subsidiaries that own 12 self-storage facilities and own 231,978 partnership units (the “Convertible Partnership Units”) in a subsidiary that are convertible on a one-for-one basis (subject to certain limitations) into common shares of the Company at the option of the unitholder. During the three months ended March 31, 2012 and 2011, we allocated a total of $0.6 million and $4.2 million, respectively, in income, and paid distributions to our Permanent Noncontrolling Interests totaling $1.1 million and $3.6 million, respectively.

During the year ended December 31, 2011, we acquired Permanent Noncontrolling Interests in 19 Subsidiaries, which includes five Subsidiaries representing public limited partnerships pursuant to mergers described in Note 9. These interests were acquired for an aggregate cost of approximately $175.5 million, consisting of $118.4 million in cash and 477,928 of our common shares with an aggregate fair value of $57.1 million based on the closing trading price of our common shares on the date of acquisition. During the three months ended March 31, 2012, we acquired additional interests in the Subsidiaries for $0.3 million in cash, of which $0.1 million was recorded as a reduction to permanent noncontrolling interests and the remainder as a reduction to paid-in capital.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

8.	Public Storage Shareholders’ Equity

Cumulative Preferred Shares

At March 31, 2012 and December 31, 2011, we had the following series of Cumulative Preferred Shares outstanding:

					At March 31, 2012				At December 31, 2011
Series	Earliest Redemption Date	Dividend Rate			Shares Outstanding		Liquidation Preference		Shares Outstanding		Liquidation Preference
					(Dollar amounts in thousands)
Series W	10/6/08		6.500	%		5,300	$	132,500		5,300	$	132,500
Series X	11/13/08		6.450	%		4,800		120,000		4,800		120,000
Series Y	1/2/09		6.850	%		-		-		350,900		8,772
Series Z	3/5/09		6.250	%		4,500		112,500		4,500		112,500
Series A	3/31/09		6.125	%		4,600		115,000		4,600		115,000
Series C	9/13/09		6.600	%		4,425		110,625		4,425		110,625
Series D	2/28/10		6.180	%		5,400		135,000		5,400		135,000
Series E	4/27/10		6.750	%		-		-		5,650		141,250
Series F	8/23/10		6.450	%		9,893		247,325		9,893		247,325
Series L	10/20/11		6.750	%		-		-		8,267		206,665
Series M	1/9/12		6.625	%		-		-		19,065		476,634
Series N	7/2/12		7.000	%		6,900		172,500		6,900		172,500
Series O	4/15/15		6.875	%		5,800		145,000		5,800		145,000
Series P	10/7/15		6.500	%		5,000		125,000		5,000		125,000
Series Q	4/14/16		6.500	%		15,000		375,000		15,000		375,000
Series R	7/26/16		6.350	%		19,500		487,500		19,500		487,500
Series S	1/12/17		5.900	%		18,400		460,000		-		-
Series T	3/13/17		5.750	%		18,500		462,500		-		-
Total Cumulative Preferred Shares						128,018	$	3,200,450		475,000	$	3,111,271

The holders of our Cumulative Preferred Shares have general preference rights with respect to liquidation and quarterly distributions. Except under certain conditions and as noted below, holders of the Cumulative Preferred Shares will not be entitled to vote on most matters. In the event of a cumulative arrearage equal to six quarterly dividends, holders of all outstanding series of preferred shares (voting as a single class without regard to series) will have the right to elect two additional members to serve on our Board of Trustees until the arrearage has been cured. At March 31, 2012, there were no dividends in arrears.

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

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

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

In January 2012, we issued 18.4 million depositary shares each representing 1/1,000 of our 5.900% Cumulative Preferred Shares, Series S for gross proceeds of $460.0 million, and we incurred $14.6 million in issuance costs.

In the three months ended March 31, 2012, we redeemed our Series E, Series L, and Series Y Cumulative Preferred Shares, at par. The aggregate redemption amount, before payment of accrued dividends, was $356.7 million. In March 2012, we called for redemption our Series M Cumulative Preferred Shares, at par. The redemption value of $476.6 million of this series has been classified as a liability at March 31, 2012. On April 11, 2012, we redeemed this series, at par. We recorded a $24.9 million EITF D-42 allocation of income from our common shareholders to the holders of our Cumulative Preferred Shares in the three months ended March 31, 2012 in connection with these redemptions.

In March 2012, we issued 18.5 million depositary shares each representing 1/1,000 of our 5.750% Cumulative Preferred Shares, Series T for gross proceeds of $462.5 million, and we incurred $14.7 million in issuance costs.

Dividends

Common share dividends, including amounts paid to our restricted share unitholders, totaled $188.1 million ($1.10 per share) and $135.9 million ($0.80 per share), for the three months ended March 31, 2012 and 2011, respectively. Preferred share dividends totaled $55.1 million and $57.6 million for the three months ended March 31, 2012 and 2011, respectively.

9.	Related Party Transactions

The Hughes Family owns approximately 16.0% of our common shares outstanding at March 31, 2012.

The Hughes Family has ownership interests in, and operates, approximately 53 self-storage facilities in Canada (“PS Canada”) using the “Public Storage” brand name pursuant to a non-exclusive, royalty-free trademark license agreement with the Company. We currently do not own any interests in these facilities nor do we own any facilities in Canada. We have a right of first refusal to acquire the stock or assets of the corporation that manages the 53 self-storage facilities in Canada, if the Hughes Family or the corporation agrees to sell them. However, we have no interest in the operations of this corporation, we have no right to acquire this stock or assets unless the Hughes Family decides to sell and we receive no benefit from the profits and increases in value of the Canadian self-storage facilities.

We reinsure risks relating to loss of goods stored by tenants in the self-storage facilities in Canada. During each of the three month periods ended March 31, 2012 and 2011, we received $0.1 million in reinsurance premiums attributable to the Canadian facilities. Since our right to provide tenant reinsurance to the Canadian facilities may be qualified, there is no assurance that these premiums will continue.

PS Canada holds approximately a 2.2% interest in Stor-RE, a consolidated entity that provides liability and casualty insurance for PS Canada, the Company and certain affiliates of the Company for occurrences prior to April 1, 2004.

On August 23, 2011, we completed mergers to acquire all of the units of limited partnership interest and general partnership interests we did not already own in each of five affiliated partnerships. For three of these partnerships, Mr. Hughes was a co-general partner along with the Company. These mergers were approved by Public Storage and the Hughes Family, who together own a majority of the limited partnership units outstanding and therefore could approve the mergers without the vote of the other limited partners. The merger consideration was based upon independent appraisals, dated April 5, 2011, from a nationally recognized appraisal firm, with allocation of the net asset value based upon the liquidation provisions of the relevant partnership documents. Under the merger agreements, the Hughes Family sold all of its general and limited partnership interests in these five partnerships for approximately $54.6 million, reflecting the same pricing and terms as the public limited partners (see “Permanent Noncontrolling Interests” in Note 7 “Noncontrolling Interests”). In addition, on August 23, 2011, the Hughes Family’s interests in a private REIT owned by the Company and the Hughes Family were acquired for approximately $0.2 million, based upon the merger value of the interests in these five partnerships owned by the private REIT. Our board of trustees appointed a special committee of independent trustees to review the terms of these acquisitions. The special committee unanimously determined that the transactions were advisable and fair to and in the respective best interests of Public Storage and its shareholders not affiliated with the Hughes Family, as well as fair to the public limited partners. The Company also engaged an investment banking firm who concluded that the consideration received in the mergers by the unaffiliated limited partners was fair to them, from a financial point of view. As a trustee, Mr. Hughes is indemnified for any litigation arising from this transaction pursuant to the indemnification agreements we have with each Public Storage trustee.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

The Hughes Family also had interests in 18 additional limited partnerships that we acquired on June 30, 2011. The acquisition price was based upon independent appraisals of the partnerships’ facilities, dated April 5, 2011, from a nationally recognized appraisal firm, with allocation of the net asset value based upon the liquidation provisions of the relevant partnership documents. We paid the Hughes Family $13.3 million for their interests. The special committee of our board of trustees also reviewed the terms of each of these purchases and unanimously determined that the purchases were fair to and in the respective best interests of Public Storage and its shareholders not affiliated with the Hughes Family. As of March 31, 2012, Mr. Hughes has withdrawn as general partner in 17 of these partnerships. At May 4, 2012, Mr. Hughes remains as general partner in one of these partnerships.

10. Share-Based Compensation

Under various share-based compensation plans, the Company can grant non-qualified options to purchase the Company’s common shares, as well as restricted share units (“RSUs”), to trustees, officers, service providers, and key employees. The terms of these grants are established by an authorized committee of our Board of Trustees.

Stock options and RSUs are considered “granted” and “outstanding” (legal grant date notwithstanding) as the terms are used herein, when the Company and the recipient reach a mutual understanding of the key terms of the award, the award has been authorized in accordance with the Company’s share grant approval procedures and, in the case of performance-based grants, it is probable that the performance condition will be met.

Stock Options

Stock option exercise prices are equal to the closing trading price of our common shares on the date of grant, vest generally over a five-year period, and expire ten years after the grant date. We use the Black-Scholes option valuation model to estimate the grant-date fair value of our stock options, and recognize these amounts, net of estimated forfeitures, as compensation expense over the applicable vesting period.

Outstanding stock option grants are included on a one-for-one basis in our diluted weighted average shares, to the extent dilutive, after applying the treasury stock method (based upon the average common share price during the period) to assumed exercise proceeds and measured but unrecognized compensation.

For each of the three month periods ended March 31, 2012 and 2011, we recorded $0.7 million in compensation expense related to stock options.

During the three months ended March 31, 2012, no stock options were granted, 134,990 options were exercised, and 4,000 options were forfeited. A total of 2,452,076 stock options were outstanding at March 31, 2012 (2,591,066 at December 31, 2011).

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

Restricted Share Units

RSUs vest ratably over a five or eight-year period from the date of grant. The grantee receives additional compensation equal to the per-share dividends received by common shareholders for each outstanding RSU. Such compensation is classified as dividends paid. When RSUs are forfeited, any dividends previously paid on such forfeited RSUs are expensed. When RSUs vest, the grantee may receive common shares equal to the number of vested restricted share units, less common shares withheld for employee statutory tax liabilities. Generally, however, deposits are made to taxing authorities on behalf of employees in lieu of the issuance of common shares (based upon the market value of the shares at the date of vesting) to settle the employees’ tax liability generated by the vesting, and is charged against paid in capital.

We recognize the estimated grant-date fair value of RSUs as compensation expense over the applicable vesting period, net of estimates for future forfeitures. Fair value is determined based upon the closing trading price of our common shares on the grant date. The employer portion of payroll taxes is expensed as incurred. We have elected to use the straight-line attribution method with respect to restricted share grants that are earned solely based upon the passage of time and continued employment. Performance–based RSU grants are amortized using the accelerated attribution method, with each vesting amortized separately over the individual vesting period.

During the three months ended March 31, 2012, 86,750 restricted share units were granted, 5,239 restricted share units were forfeited and 119,883 restricted share units vested. This vesting resulted in the issuance of 75,713 common shares. In addition, cash compensation totaling $6.0 million was paid to employees in lieu of 44,170 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, 2012, approximately 663,127 restricted share units were outstanding (701,499 at December 31, 2011). A total of $4.6 million and $4.4 million in restricted share unit expense was recorded for the three months ended March 31, 2012 and 2011, respectively, and includes the compensation expense amounts with respect to the 266,800 RSUs granted under our 2011 performance-based restricted share unit program described above.

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

11.	Segment Information

Our reportable segments reflect the significant components of our operations that are evaluated separately by our chief operating decision maker and have discrete financial information available. Our segments are organized based upon differences in the nature of the underlying products, services, and whether the operation is located in the U.S. or outside the U.S. In making resource allocation decisions, our chief operating decision maker reviews the net income from continuing operations of each reportable segment included in the tables below, excluding the impact of depreciation and amortization, gains or losses on disposition of real estate facilities, and real estate impairment charges. The amounts for each reportable segment included in the tables below are in conformity with GAAP and our significant accounting policies as denoted in Note 2, and exclude ancillary revenues and expenses, interest income (other than from Loans Receivable from Unconsolidated Real Estate Entities), interest expense, general and administrative expense, and gains and losses on the early repayment of debt, none of which can be allocated to any reportable segment. Our chief operating decision maker does not consider the book value of assets in making resource allocation decisions.

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

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

Domestic Self-Storage Segment

The Domestic Self-Storage Segment includes the operations of the 2,048 self-storage facilities owned by the Company and the Subsidiaries, as well as our equity share of the Other Investments. For all periods presented, substantially all of our real estate facilities, goodwill and other intangible assets, other assets, and accrued and other liabilities are associated with the Domestic Self-Storage Segment.

European Self-Storage Segment

The European Self-Storage segment comprises our interest in Shurgard Europe, which has self-storage operations in seven western European countries. It has a separate management team that determines the strategic direction for this segment under the direction of our chief operating decision maker and our joint venture partner which owns a 51% equity interest in Shurgard Europe. The European 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 foreign currency exchange gains and losses that are attributable to Shurgard Europe. Our balance sheet includes an investment in Shurgard Europe (Note 4) and a loan receivable from Shurgard Europe (Note 5).

Commercial Segment

The Commercial segment comprises our investment in PSB, a self-managed REIT with a separate management team that makes its financing, capital allocation and other significant decisions. The Commercial segment also includes our direct interest in certain commercial facilities, substantially all of which are managed by PSB. The Commercial segment presentation includes our equity earnings and interest income from PSB, as well as the revenues and expenses of our commercial facilities. At March 31, 2012, the assets of the Commercial segment are comprised principally of our investment in PSB (Note 4).

Presentation of Segment Information

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

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

For the three months ended March 31, 2012

	Domestic Self-Storage		European Self-Storage		Commercial		Other Items Not Allocated to Segments			Total
	(Amounts in thousands)
Revenues:
Self-storage facilities	$	407,688	$	-	$	-	$	-		$	407,688
Ancillary operations		-		-		3,501		25,775			29,276
Interest and other income		-		5,055		-		600			5,655
		407,688		5,055		3,501		26,375			442,619

Expenses:
Cost of operations:
Self-storage facilities		138,974		-		-		-			138,974
Ancillary operations		-		-		1,304		8,214			9,518
Depreciation and amortization		86,238		-		700		-			86,938
General and administrative		-		-		-		16,405			16,405
Interest expense		-		-		-		5,334			5,334
		225,212		-		2,004		29,953			257,169

Income (loss) from continuing operations before equity in earnings of unconsolidated real estate entities, and foreign currency exchange gain		182,476		5,055		1,497		(3,578	)		185,450

Equity in earnings of unconsolidated real estate entities		378		6,842		1,895		-			9,115
Foreign currency exchange gain		-		12,157		-		-			12,157
Net income (loss)	$	182,854	$	24,054	$	3,392	$	(3,578	)	$	206,722

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

For the three months ended March 31, 2011

	Domestic Self-Storage			European Self-Storage		Commercial		Other Items Not Allocated to Segments			Total
	(Amounts in thousands)
Revenues:
Self-storage facilities	$	385,008		$	-	$	-	$	-		$	385,008
Ancillary operations		-			-		3,800		23,115			26,915
Interest and other income		-			6,803		195		770			7,768
		385,008			6,803		3,995		23,885			419,691

Expenses:
Cost of operations:
Self-storage facilities		135,327			-		-		-			135,327
Ancillary operations		-			-		1,514		7,400			8,914
Depreciation and amortization		87,838			-		673		-			88,511
General and administrative		-			-		-		14,235			14,235
Interest expense		-			-		-		6,984			6,984
		223,165			-		2,187		28,619			253,971

Income (loss) from continuing operations before equity in earnings of unconsolidated real estate entities, foreign currency exchange gain and gain on real estate sales		161,843			6,803		1,808		(4,734	)		165,720

Equity in earnings of unconsolidated real estate entities		405			4,527		8,784		-			13,716
Foreign currency exchange gain		-			31,252		-		-			31,252
Gain on real estate sales		-			-		-		198			198
Income (loss) from continuing operations		162,248			42,582		10,592		(4,536	)		210,886
Discontinued operations		(318	)		-		-		-			(318	)
Net income (loss)	$	161,930		$	42,582	$	10,592	$	(4,536	)	$	210,568

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

12.	Commitments and Contingencies

Contingent Losses

We are a party to various legal proceedings and subject to various claims and complaints that have arisen in the normal course of business. We believe that the likelihood of these pending legal matters and other contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.

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 losses and $102 million for general liability losses are higher than estimates of maximum probable loss that could occur from individual catastrophic events determined in recent engineering and actuarial studies; however, in case of multiple catastrophic events, these limits could be exhausted.

Our tenant insurance program reinsures a program that provides insurance to certificate holders against claims for property losses due to specific named perils (earthquakes are not covered by these policies) to goods stored by tenants at our self-storage facilities for individual limits up to a maximum of $5,000. We have third-party insurance coverage for claims paid exceeding $5.0 million resulting from any one individual event, to a limit of $15.0 million. At March 31, 2012, there were approximately 700,000 certificate holders held by our self-storage tenants participating in this program, representing aggregate coverage of approximately $1.5 billion. We rely on a third-party insurance company to provide the insurance and are subject to licensing requirements and regulations in several states.

13.	Subsequent Events

On May 4, 2012, we called for redemption all of our outstanding 6.9 million depositary shares each representing 1/1,000 of a 7.00% Cumulative Preferred Share of Beneficial Interest, Series N at par. The aggregate redemption amount, before payment of accrued dividends, to be paid on July 2, 2012, is $172.5 million. We will record an EITF D-42 allocation of approximately $5.4 million from our common shareholders to the holders of our Preferred Shares in the quarter ending June 30, 2012 as a result of this redemption.

We have also entered into contracts to acquire four self-storage properties, located in California (two), Florida and New York, for an aggregate purchase price of $46.0 million, cash. We expect the pending acquisitions of these properties will close in the second quarter of 2012. The pending acquisitions are subject to various conditions and contingencies and there can be no assurance that they will be completed.

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 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 our actual results and performance to be materially different from those expressed or implied in the forward-looking statements. As a result, you should not rely on any forward-looking statements in this report, or which management may make orally or in writing from time to time, as predictions of future events nor guarantees of future performance. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement.

Factors and risks that may impact our future results and performance include, but are not limited to, those described in Part I, Item 1A, "Risk Factors" in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 24, 2012 and in our other filings with the SEC and the following:

·	general risks associated with the ownership and operation of real estate including changes in demand, potential liability for environmental contamination, natural disasters, and adverse changes in laws and regulations governing property tax, real estate and zoning;

·	risks associated with downturns in the national and local economies in the markets in which we operate, including risks related to current economic conditions and the economic health of our tenants;

·	the impact of competition from new and existing self-storage and commercial facilities and other storage alternatives;

·	difficulties in our ability to successfully evaluate, finance, integrate into our existing operations, and manage acquired and developed properties;

·	risks associated with international operations including, but not limited to, unfavorable foreign currency rate fluctuations and local and global economic uncertainty that could adversely affect our earnings and cash flows;

·	risks related to our participation in joint ventures;

the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing environmental, tax and tenant insurance matters and real estate investment trusts (“REITs”), and risks related to the impact of new laws and regulations;

·	risk of increased tax expense associated either with a possible failure by us to qualify as a REIT, or with challenges to intercompany transactions with our taxable REIT subsidiaries;

·	disruptions or shutdowns of our automated processes and systems or breaches of our data security;

·	difficulties in raising capital at a reasonable cost; and

·	economic uncertainty due to the impact of war or terrorism.

We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, new estimates, or other factors, events or circumstances after the date of this document, except where required by law. Accordingly, you should use caution in relying on past forward-looking statements to anticipate future results.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”). The preparation of our financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and results of operations requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes. The notes to our March 31, 2012 financial statements, primarily Note 2, summarize the significant accounting policies and methods used in the preparation of our financial statements and related disclosures.

We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.

Income Tax Expense: We have elected to be treated as a real estate investment trust (“REIT”), as defined in the Internal Revenue Code. As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) each year, and if we meet certain organizational and operational rules. We believe we have met these REIT requirements in 2011 and for all other periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our assumption that we have met the REIT requirements could be incorrect, because the REIT requirements are complex, require ongoing factual determinations, and there could be future unanticipated changes in our circumstances, or circumstances in previous years that we did not identify could affect our compliance. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our financial statements.

In addition, our taxable REIT subsidiaries are taxable as a regular corporation. To the extent that amounts paid to us by our taxable REIT subsidiaries are determined by the taxing authorities to be in excess of amounts that would be paid under similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. If we became subject to such a penalty tax, our net income could be materially overstated from our current estimates.

Impairment of Long-Lived Assets: Substantially all of our assets, consisting primarily of real estate, are long-lived assets. The evaluation of long-lived assets for impairment involves identification of indicators of impairment, projections of future operating cash flows, and determining fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions than we did regarding impairment. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in assumptions as to cash flows or fair values, could have a material adverse impact on our financial condition and results of operations.

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

Accruals for Contingencies: We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with GAAP, we have not accrued for certain potential liabilities because the loss is either not probable or not reasonably estimable or because we are not aware of the event. We could in the future accrue additional amounts for such liabilities, due to future events and the results of further investigation or litigation. Such accruals could have a material adverse impact on our financial condition or results of operations.

Valuation of real estate and intangible assets acquired: In reporting the acquisition of operating self-storage facilities in our financial statements, we must estimate the fair value of the land, buildings, and intangible assets acquired in these transactions. These estimates are based upon many assumptions, subject to a significant degree of judgment, including estimating discount rates, replacement costs of land and buildings, future cash flows from the tenant base in place at the time of the acquisition, and future revenues to be earned and expenses to be incurred with respect to acquired properties. We believe that the assumptions we used were reasonable, however, others could come to materially different conclusions as to the estimated values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, as well as the amounts included on our balance sheets for real estate and intangible assets.

Overview

Our principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, generally on a month-to-month basis, for personal and business use. We are the largest owner of self-storage facilities in the U.S., which represents our Domestic Self-Storage segment. A large portion of management time is focused on maximizing revenues and managing expenses at our self-storage facilities, which is the primary driver of growth in our net income and cash flow from operations and contributed 92% of our revenues for the three months ended March 31, 2012.

The remainder of our operations is comprised of our European Self-Storage segment through our investment in Shurgard Europe, our Commercial segment primarily through our investment in PS Business Parks, Inc. (“PSB”), and the operations not allocated to any segment, each of which is described in Note 11 to our March 31, 2012 financial statements.

The self-storage industry is subject to general economic conditions, particularly conditions that affect the spending habits of consumers and moving trends.

Our ability to effectively deploy capital to expand our asset base is an important component of our long-term growth strategy. Since the beginning of 2010, we have acquired 59 self-storage facilities for approximately $362 million, noncontrolling interests in subsidiaries owning self-storage facilities for $196 million, and we invested $117 million in Shurgard Europe to fund its acquisition of the remaining interests it did not own in 72 self-storage facilities.

We believe that there may be opportunities to acquire additional self-storage facilities from third parties in the remainder of 2012, because we continue to see self-storage facilities come to market. However, there is significant competition for facilities marketed in many of the geographic locations we find attractive. As a result, there can be no assurance that we will be able to acquire facilities on terms we find attractive.

Due to the challenging operating environment and our belief that acquisitions of self-storage facilities are more economically advantageous, we have substantially curtailed our development activities. We continue to have a nominal development pipeline at March 31, 2012.

Other investments we have made in the past, and may make in the future, include i) further investment in Shurgard Europe to allow it to develop or acquire facilities, ii) further investment in PSB, and iii) the early retirement of debt or redemption of preferred securities. There can be no assurance that these other investment alternatives will be attractive in the long-term, or will even be available as investment alternatives.

We believe that we are not dependent upon raising capital to fund our operations or meet our obligations, due to our low levels of debt and significant cash from operations available for principal payments on debt and reinvestment (see “Liquidity and Capital Resources” below). However, access to capital is important to growing our asset base. We choose between the issuance of common and preferred securities based upon the relative cost of capital. For at least the last ten years, we have raised cash proceeds for growth and other corporate purposes primarily through the issuance of preferred securities, while we have issued common equity only in connection with mergers and the acquisition of interests in real estate entities. Our ability to raise capital at favorable costs is dependent upon capital market conditions. When market conditions are favorable, we have generally been able to raise capital as necessary; however, there can be no assurance that future market conditions will permit us to raise capital at favorable costs. During the year ended December 31, 2011, we issued approximately $863 million of preferred securities. During the three months ended March 31, 2012, we issued another $923 million of preferred securities.

At March 31, 2012, we had approximately $620 million of cash and we have access to a $300 million line of credit which expires March 21, 2017. On April 11, 2012, we paid $477 million to redeem our Series M Cumulative Preferred Shares. As of May 4, 2012, we are under contract (subject to contingencies) to acquire four facilities for an aggregate purchase price of $46 million, in cash. We have called for redemption our Series N Preferred Shares ($173 million) on July 2, 2012. After May 4, 2012, we have no other significant commitments until 2013, when $265 million of existing debt comes due.

Results of Operations

Operating Results for the Three Months Ended March 31, 2012 and 2011

For the three months ended March 31, 2012, net income allocable to our common shareholders was $125.3 million or $0.73 per diluted common share, compared to $148.1 million or $0.87 per diluted common share for the same period in 2011, representing a decrease of $22.8 million or $0.14 per diluted common share. This decrease is due to (i) a $30.1 million reduction in income allocated to common shareholders, in connection with applying EITF D-42 to our redemptions of preferred shares and our pro rata share of PSB’s preferred equity redemptions and (ii) a $19.1 million decline in foreign currency exchange gain, offset partially by (iii) improved property operations.

Funds from Operations

For the three months ended March 31, 2012, funds from operations (“FFO”) was $1.35 per diluted common share as compared to $1.48 for the same period in 2011, representing a decrease of $0.13.

For the three months ended March 31, 2012, FFO was impacted by a foreign currency exchange gain of $12.2 million (compared to $31.3 million for the same period in 2011) and a $27.1 million charge in applying EITF D-42 to our and PSB’s redemptions of preferred shares (compared to a $3.0 million gain for the same period in 2011).

The following table provides a summary of the per-share impact of the items noted above:

	Three Months Ended March 31,
	2012			2011		Percentage Change

FFO per diluted common share prior to adjustments for the following items	$	1.44		$	1.28		12.5	%

Foreign currency exchange gain		0.07			0.18
Application of EITF D-42 to the redemption of our securities and our equity share from PSB		(0.16	)		0.02

FFO per diluted common share, as reported	$	1.35		$	1.48		(8.8	)%