Edgar Filing: Public Storage

ps10q_2q12.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 June 30, 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 August 1, 2012:

Common Shares of beneficial interest, $.10 par value per share – 171,564,965 shares

PUBLIC STORAGE

INDEX


PART I	FINANCIAL INFORMATION	Pages

Item 1.	Financial Statements (Unaudited)

	Balance Sheets at June 30, 2012 and December 31, 2011	1

	Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011	2

	Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011	3

	Statement of Equity for the Six Months Ended June 30, 2012	4

	Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	5 - 6

	Condensed Notes to Financial Statements	7 - 29

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30 - 56

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56

Item 4.	Controls and Procedures	57

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

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58 – 59

Item 6.	Exhibits	59

PUBLIC STORAGE

BALANCE SHEETS

(Amounts in thousands, except share data)

	June 30, 2012			December 31, 2011
ASSETS	(Unaudited)

Cash and cash equivalents	$	438,475		$	139,008
Real estate facilities, at cost:
Land		2,840,443			2,811,515
Buildings		8,071,586			7,966,061
		10,912,029			10,777,576
Accumulated depreciation		(3,568,254	)		(3,398,379	)
		7,343,775			7,379,197

Investment in unconsolidated real estate entities		703,458			714,627
Goodwill and other intangible assets, net		212,419			209,833
Loans receivable from unconsolidated real estate entities		391,146			402,693
Other assets		89,674			87,204
Total assets	$	9,178,947		$	8,932,562

LIABILITIES AND EQUITY

Notes payable	$	368,728		$	398,314
Preferred shares called for redemption (Note 8)		415,625			-
Accrued and other liabilities		226,825			210,966
Total liabilities		1,011,178			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, 122,893 shares issued (in series) and outstanding, (475,000 at December 31, 2011) at liquidation preference		3,072,325			3,111,271
Common Shares of beneficial interest, $0.10 par value, 650,000,000 shares authorized, 170,543,534 shares issued and outstanding (170,238,805 at December 31, 2011)		17,054			17,024
Paid-in capital		5,414,682			5,442,506
Accumulated deficit		(339,020	)		(259,578	)
Accumulated other comprehensive loss		(27,433	)		(23,014	)
Total Public Storage shareholders’ equity		8,137,608			8,288,209
Permanent noncontrolling interests		30,161			22,718
Total equity		8,167,769			8,310,927
Total liabilities and equity	$	9,178,947		$	8,932,562

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011

Revenues:
Self-storage facilities	$	420,466		$	394,953		$	827,855		$	779,671
Ancillary operations		31,733			28,891			61,009			55,806
Interest and other income		5,540			10,575			11,195			18,343
		457,739			434,419			900,059			853,820
Expenses:
Cost of operations:
Self-storage facilities		129,355			129,632			268,227			264,874
Ancillary operations		9,781			9,597			19,299			18,511
Depreciation and amortization		88,533			89,098			175,415			177,544
General and administrative		12,414			12,593			28,819			26,828
Interest expense		5,067			5,933			10,401			12,917
		245,150			246,853			502,161			500,674
Income from continuing operations before equity in earnings of unconsolidated real estate entities, foreign currency exchange (loss) gain, and gain (loss) on real estate sales		212,589			187,566			397,898			353,146
Equity in earnings of unconsolidated real estate entities		8,596			12,770			17,711			26,486
Foreign currency exchange (loss) gain		(23,657	)		10,496			(11,500	)		41,748
Gain (loss) on real estate sales		1,263			(70	)		1,263			128
Income from continuing operations		198,791			210,762			405,372			421,508
Discontinued operations		140			179			281			1
Net income		198,931			210,941			405,653			421,509
Net income allocated to noncontrolling interests		(788	)		(4,497	)		(1,658	)		(8,957	)
Net income allocable to Public Storage shareholders	$	198,143		$	206,444		$	403,995		$	412,552
Allocation of net income to Public Storage shareholders:
Preferred shareholders based on distributions paid	$	51,910		$	58,639		$	107,005		$	116,256
Preferred shareholders based on redemptions		13,427			15,899			38,327			15,899
Restricted share units		463			391			977			823
Common shareholders		132,343			131,515			257,686			279,574
	$	198,143		$	206,444		$	403,995		$	412,552
Net income per common share – basic
Continuing operations	$	0.78		$	0.78		$	1.51		$	1.65
Discontinued operations		-			-			-			-
	$	0.78		$	0.78		$	1.51		$	1.65
Net income per common share – diluted
Continuing operations	$	0.77		$	0.77		$	1.50		$	1.64
Discontinued operations		-			-			-			-
	$	0.77		$	0.77		$	1.50		$	1.64
Basic weighted average common shares outstanding		170,496			169,492			170,402			169,404
Diluted weighted average common shares outstanding		171,560			170,401			171,487			170,392

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011

Net income	$	198,931		$	210,941		$	405,653		$	421,509
Other comprehensive (loss) income:
Aggregate foreign currency translation adjustments		(39,140	)		12,840			(15,919	)		59,187
Adjust for foreign currency translation loss (gain) included in net income		23,657			(10,496	)		11,500			(41,748	)
Other comprehensive (loss) income		(15,483	)		2,344			(4,419	)		17,439
Total comprehensive income		183,448			213,285			401,234			438,948
Comprehensive income allocated to noncontrolling interests:
Based upon income of the subsidiaries		(788	)		(4,497	)		(1,658	)		(8,957	)
Comprehensive income allocable to Public Storage Shareholders	$	182,660		$	208,788		$	399,576		$	429,991

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			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 (48,400,000 shares) (Note 8)		1,210,000			-		(38,475	)		-			-			1,171,525			-			1,171,525
Redemption of cumulative preferred shares (49,957,833 shares) (Note 8)		(1,248,946	)		-		-			-			-			(1,248,946	)		-			(1,248,946	)
Issuance of common shares in connection with share-based compensation (304,729 shares) (Note 10)		-			30		15,538			-			-			15,568			-			15,568
Share-based compensation expense, net of cash paid in lieu of common shares (Note 10)		-			-		3,968			-			-			3,968			-			3,968
Acquisition of redeemable noncontrolling interests (Note 7)		-			-		(7,954	)		-			-			(7,954	)		-			(7,954	)
Increase (decrease) in permanent noncontrolling interest in connection with:
Consolidation of partially-owned entities (Note 4)		-			-		-			-			-			-			8,224			8,224
Acquisition of interests in Subsidiaries (Note 7)		-			-		(901	)		-			-			(901	)		(75	)		(976	)
Net income of the Company		-			-		-			405,653			-			405,653			-			405,653
Net income allocated to:
Redeemable noncontrolling interests		-			-		-			(236	)		-			(236	)		-			(236	)
Permanent noncontrolling interests		-			-		-			(1,422	)		-			(1,422	)		1,422			-
Distributions to equity holders:
Cumulative preferred shares (Note 8)		-			-		-			(107,005	)		-			(107,005	)		-			(107,005	)
Permanent noncontrolling interests		-			-		-			-			-			-			(2,128	)		(2,128	)
Common shares and restricted share units ($2.20 per share)		-			-		-			(376,432	)		-			(376,432	)		-			(376,432	)
Other comprehensive loss (Note 2)		-			-		-			-			(4,419	)		(4,419	)		-			(4,419	)
Balance at June 30, 2012	$	3,072,325		$	17,054	$	5,414,682		$	(339,020	)	$	(27,433	)	$	8,137,608		$	30,161		$	8,167,769

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	For the Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	405,653		$	421,509
Adjustments to reconcile net income to net cash provided by operating activities:
(Gain) loss on real estate sales and debt retirement, net, including amounts in discontinued operations		(1,263	)		125
Depreciation and amortization, including amounts in discontinued operations		175,526			177,739
Distributions received from unconsolidated real estate entities in excess of equity in earnings of unconsolidated real estate entities		4,393			2,892
Foreign currency exchange loss (gain)		11,500			(41,748	)
Other		9,968			21,947
Total adjustments		200,124			160,955
Net cash provided by operating activities		605,777			582,464
Cash flows from investing activities:
Capital improvements to real estate facilities		(40,298	)		(44,292	)
Construction in process		(1,622	)		(10,531	)
Acquisition of real estate facilities and property intangibles (Note 3)		(88,067	)		(34,361	)
Proceeds from sales of other real estate investments		-			400
Loans to unconsolidated real estate entities		-			(358,877	)
Repayments of loans receivable from unconsolidated real estate entities (Note 5)		-			27,289
Disposition of loans receivable from unconsolidated real estate entities (Note 5)		-			121,317
Acquisition of investments in unconsolidated real estate facilities		-			(1,274	)
Maturities of marketable securities		-			102,279
Other investing activities		5,341			3,792
Net cash used in investing activities		(124,646	)		(194,258	)
Cash flows from financing activities:
Principal payments on notes payable		(28,788	)		(126,813	)
Net proceeds from the issuance of common shares		15,568			12,973
Issuance of cumulative preferred shares		1,171,525			363,664
Redemption of cumulative preferred shares		(833,321	)		(517,500	)
Acquisition of redeemable noncontrolling interests in subsidiaries		(19,900	)		-
Acquisition of permanent noncontrolling interests		(976	)		(12,026	)
Distributions paid to Public Storage shareholders		(483,437	)		(413,613	)
Distributions paid to noncontrolling interests		(2,773	)		(7,148	)
Net cash used in financing activities		(182,102	)		(700,463	)
Net increase (decrease) in cash and cash equivalents		299,029			(312,257	)
Net effect of foreign exchange translation on cash		438			492
Cash and cash equivalents at the beginning of the period		139,008			456,252
Cash and cash equivalents at the end of the period	$	438,475		$	144,487

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

(Continued)

	For the Six Months Ended June 30,
	2012			2011
Supplemental schedule of non-cash investing and financing activities:

Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation	$	(158	)	$	(486	)
Investment in unconsolidated real estate entities		4,968			(16,543	)
Loans receivable from unconsolidated real estate entities		11,547			(41,666	)
Accumulated other comprehensive (loss) income		(15,919	)		59,187

Preferred shares called for redemption and reclassified to liabilities		415,625			-
Preferred shares called for redemption and reclassified from equity		(415,625	)		-

Consolidation of entities previously accounted for under the equity method of accounting (Note 4):
Real estate facilities		(10,403	)		-
Investments in unconsolidated real estate entities		3,072			-
Intangible assets		(949	)		-
Permanent noncontrolling interests in subsidiaries		8,224			-

Adjustments of redeemable noncontrolling interests to fair values:
Accumulated deficit		-			(218	)
Redeemable noncontrolling interests		-			218

Conversion of loan receivable from Shurgard Europe to investment (Note 2):
Loans receivable from unconsolidated real estate entities		-			116,560
Investment in unconsolidated real estate entities		-			(116,560	)

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

Real estate acquired in exchange for assumption of note payable		-			(9,679	)
Note payable assumed in connection with acquisition of real estate		-			9,679

See accompanying notes.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 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 June 30, 2012, we had direct and indirect equity interests in 2,068 self-storage facilities (with approximately 132 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 June 30, 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 and six months ended June 30, 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 June 30, 2011 financial statements have been reclassified to conform to the June 30, 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 investments 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

June 30, 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 June 30, 2012, the Company and the Subsidiaries own 2,054 self-storage facilities in the U.S., one self-storage facility in London, England and six commercial facilities in the U.S. At June 30, 2012, the Unconsolidated Real Estate Entities are comprised of PSB, Shurgard Europe, as well as limited partnerships that own an aggregate of 14 self-storage facilities in the U.S. with 0.8 million net rentable square feet (these limited partnerships, for the periods in which the reference applies, are referred to as the “Other Investments”).

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 June 30, 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

June 30, 2012

(Unaudited)

Acquisitions of interests in operating self-storage facilities, including the consolidation of entities where we obtain control other than by acquiring interests, are accounted for under the provisions of Codification Section 805, “Business Combinations.” The net acquisition cost, consisting of the fair value of our existing investment, any cash paid to third parties for their interests, 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. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring 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

June 30, 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 June 30, 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 June 30, 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 June 30, 2012, these intangibles have a net book value of $19.0 million ($16.4 million at December 31, 2011). Accumulated amortization totaled $22.8 million at June 30, 2012 ($24.1 million at December 31, 2011), and amortization expense of $2.6 million was recorded for each of the three month periods ended June 30, 2012 and 2011, respectively, and $4.6 million and $6.1 million was recorded for the six months ended June 30, 2012 and 2011, respectively. During the six months ended June 30, 2012, these intangibles were increased by (i) $6.2 million in connection with the acquisition of self-storage facilities (Note 3) and (ii) $0.9 million in connection with the consolidation of three facilities we previously accounted for under the equity method (Note 4).

The “Shurgard” tradename, which is used by Shurgard Europe pursuant to a licensing agreement, has a book value of $18.8 million at June 30, 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 June 30, 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

June 30, 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 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 1.258 U.S. Dollars per Euro at June 30, 2012 (1.295 at December 31, 2011), and average exchange rates of 1.284 and 1.438 for the three months ended June 30, 2012 and 2011, respectively, and average exchange rates of 1.297 and 1.402 for the six months ended June 30, 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 and statements of comprehensive 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.”

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 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 the redeemed security to the extent the redemption cost is greater 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.

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 June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
	(Amounts in thousands)
Net income allocable to common shareholders from continuing operations and discontinued operations:

Net income allocable to common shareholders	$	132,343		$	131,515		$	257,686		$	279,574

Eliminate: Discontinued operations allocable to common shareholders		(140	)		(179	)		(281	)		(1	)
Net income from continuing operations allocable to common shareholders	$	132,203		$	131,336		$	257,405		$	279,573

Weighted average common shares and equivalents outstanding:
Basic weighted average common shares outstanding		170,496			169,492			170,402			169,404
Net effect of dilutive stock options - based on treasury stock method		1,064			909			1,085			988
Diluted weighted average common shares outstanding		171,560			170,401			171,487			170,392

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

3.	Real Estate Facilities

Activity in real estate facilities is as follows:

	Six Months Ended June 30, 2012
	(Amounts in thousands)
Operating facilities, at cost:
Beginning balance	$	10,777,576
Capital improvements		40,298
Acquisition of real estate facilities		92,282
Current development		1,622
Impact of foreign exchange rate changes		251
Ending balance		10,912,029
Accumulated depreciation:
Beginning balance		(3,398,379	)
Depreciation expense		(169,782	)
Impact of foreign exchange rate changes		(93	)
Ending balance		(3,568,254	)
Total real estate facilities at June 30, 2012	$	7,343,775

During the six months ended June 30, 2012, we acquired ten operating self-storage facilities (848,000 net rentable square feet) for an aggregate cost of $88.1 million of cash. The aggregate cost was allocated $81.9 million to real estate facilities and $6.2 million to intangible assets for acquired tenants in place.

During the six months ended June 30, 2012, we began to consolidate a limited partnership that we had previously accounted for using the equity method (see Note 4). The three self-storage facilities (183,000 net rentable square feet) owned by this entity, having an aggregate fair market value of $10.4 million, have been added to our operating facilities.

4.	Investments in Real Estate Entities

The following tables set forth our investments in the Unconsolidated Real Estate Entities at June 30, 2012 and December 31, 2011, and our equity in earnings of the Unconsolidated Real Estate Entities for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):

	Investments in Unconsolidated Real Estate Entities at
	June 30, 2012		December 31, 2011
PSB	$	319,600	$	328,508
Shurgard Europe		375,199		375,467
Other Investments		8,659		10,652
Total	$	703,458	$	714,627

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

	Equity in Earnings of Unconsolidated Real Estate Entities for the Three Months Ended June 30,				Equity in Earnings of Unconsolidated Real Estate Entities for the Six Months Ended June 30,
	2012		2011		2012		2011
PSB	$	731	$	6,081	$	2,626	$	14,865
Shurgard Europe		7,480		6,242		14,322		10,769
Other Investments		385		447		763		852
Total	$	8,596	$	12,770	$	17,711	$	26,486

During the six months ended June 30, 2012 and 2011, we received cash distributions from the Unconsolidated Real Estate Entities totaling $22.1 million and $29.4 million, respectively.

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange, and controls an operating partnership. We have a 42% common equity interest in PSB as of June 30, 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 June 30, 2012 ($67.72 per share of PSB common stock), the shares and units we owned had a market value of approximately $887.6 million.

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

	2012			2011
	(Amounts in thousands)
For the six months ended June 30:
Total revenue	$	170,634		$	146,778
Costs of operations		(55,832	)		(49,811	)
Depreciation and amortization		(54,442	)		(41,718	)
General and administrative		(4,685	)		(3,318	)
Other items		(10,475	)		(1,951	)
Net income		45,200			49,980
Net income allocated to preferred unitholders, preferred shareholders and restricted stock unitholders (a)		(38,849	)		(13,781	)
Net income allocated to common shareholders and common unitholders	$	6,351		$	36,199

(a) Includes EITF D-42 allocations to preferred equity holders of $13.5 million and from preferred equity holders of $7.4 million, during the six months ended June 30, 2012 and 2011, respectively, related to PSB’s redemption of preferred securities.
	June 30, 2012			December 31, 2011
	(Amounts in thousands)

Total assets (primarily real estate)	$	2,113,379		$	2,138,619
Debt		521,662			717,084
Other liabilities		68,348			60,940
Preferred stock and units		787,250			604,129
Common equity and units		736,119			756,466

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

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 (See Note 5).

Changes in foreign currency exchange rates caused our investment in Shurgard Europe to decrease approximately $5.0 million and increase approximately $16.5 million during the six months ended June 30, 2012 and 2011, respectively.

For all periods presented, 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:

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2012		2011			2012		2011
	(Amounts in thousands)
Our 49% equity share of Shurgard Europe’s net income (loss)	$	2,715	$	(1,599	)	$	4,700	$	(3,608	)
Add our 49% equity share of amounts received from Shurgard Europe:
Interest on loans due from Shurgard Europe		4,468		7,517			9,027		13,806
Trademark license fee		297		324			595		571

Total equity in earnings of Shurgard Europe	$	7,480	$	6,242		$	14,322	$	10,769

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 two joint ventures), rather than our pro rata share, and are based upon our historical acquired book basis.

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2012			2011			2012			2011
	(Amounts in thousands)

Self-storage and ancillary revenues	$	60,549		$	66,024		$	121,323		$	128,272
Interest and other income		35			86			189			203
Self-storage and ancillary cost of operations		(24,814	)		(27,687	)		(49,821	)		(53,962	)
Trademark license fee payable to Public Storage		(606	)		(661	)		(1,214	)		(1,166	)
Depreciation and amortization		(14,953	)		(18,236	)		(31,664	)		(36,701	)
General and administrative		(3,499	)		(2,924	)		(6,181	)		(5,620	)
Interest expense on third party debt		(2,004	)		(3,776	)		(4,526	)		(7,292	)
Interest expense on debt due to Public Storage		(9,119	)		(15,341	)		(18,423	)		(28,176	)
Expenses from foreign currency exchange		(49	)		(749	)		(91	)		(106	)
Net income (loss)	$	5,540		$	(3,264	)	$	9,592		$	(4,548	)

Net income allocated to permanent noncontrolling equity interests		-			-			-			(2,816	)
Net income (loss) allocated to Shurgard Europe	$	5,540		$	(3,264	)	$	9,592		$	(7,364	)
Average exchange rates Euro to the U.S. dollar		1.284			1.438			1.297			1.402

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)


	June 30, 2012		December 31, 2011
	(Amounts in thousands)
Total assets (primarily self-storage facilities)	$	1,362,903	$	1,430,307
Total debt to third parties		238,176		280,065
Total debt to Public Storage		391,146		402,693
Other liabilities		76,182		85,917
Equity		657,399		661,632

Exchange rate at end of period Euro to the U.S. dollar		1.258		1.295

Other Investments

At June 30, 2012, the “Other Investments” include an aggregate common equity ownership of approximately 26% in various limited partnerships that collectively own 14 self-storage facilities.

During the six months ended June 30, 2012, we began to consolidate a limited partnership due to a change in control. As a result, we recorded a gain of $1.3 million on the disposition of our existing investment, representing the difference between the aggregate fair value of the investment ($3.1 million) and the book value ($1.8 million). The $3.1 million fair value of our existing investment was allocated to real estate facilities ($10.4 million), intangible assets ($0.9 million), and permanent noncontrolling interests ($8.2 million).

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 six months ended June 30:
Total revenue	$	6,649		$	6,434
Cost of operations and other expenses		(2,581	)		(2,577	)
Depreciation and amortization		(1,062	)		(1,145	)
Net income	$	3,006		$	2,712


	June 30, 2012			December 31, 2011
	(Amounts in thousands)

Total assets (primarily self-storage facilities)	$	29,155		$	29,554
Total accrued and other liabilities		1,192			1,363
Total Partners’ equity		27,963			28,191

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 and six months ended June 30, 2011, we recorded interest income of approximately $0.3 million and $0.5 million, respectively, related to the loan. The loan was repaid in 2011.

As of June 30, 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 ($391.1 million at June 30, 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.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

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 and six months ended June 30, 2012, we recorded interest income of approximately $4.7 million and $9.4 million, respectively, as compared to $7.8 million and $14.4 million for the same periods in 2011, related to the Euro-denominated loan to Shurgard Europe. These amounts reflect 51% of the aggregate interest on the loan, with the other 49% classified as equity in earnings of unconsolidated real estate entities. In addition, we received $1.7 million from our joint venture partner for funding its 51% pro rata share of Shurgard Europe’s cost to acquire the interests, and recorded this amount as interest and other income for the three and six months ended June 30, 2011.

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

6.	Line of Credit and Notes Payable

We have a $300 million revolving line of credit (the “Credit Facility”) that expires on March 21, 2017. Amounts drawn on the Credit Facility bear an annual interest rate ranging from LIBOR plus 0.925% to LIBOR plus 1.850% depending on our credit ratings (LIBOR plus 0.950% at June 30, 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 June 30, 2012). We had no outstanding borrowings on our Credit Facility at June 30, 2012 or at August 3, 2012. We had undrawn standby letters of credit, which reduce our borrowing capacity with respect to the Credit Facility by the amount of the letters of credit, totaling $15.3 million at June 30, 2012 ($18.4 million at December 31, 2011).

The carrying amounts of our notes payable at June 30, 2012 and December 31, 2011 consist of the following (dollar amounts in thousands):

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

	June 30, 2012		December 31, 2011
Unsecured Notes Payable:

5.9% effective and stated note rate, interest only and payable semi-annually, matures in March 2013	$	186,460	$	186,460

Secured Notes Payable:

5.1% average effective rate, secured by 70 facilities with a net book value of approximately $421 million at June 30, 2012 and stated note rates between 4.95% and 7.43%, maturing at varying dates between September 2012 and September 2028 (carrying amount includes $1,641 of unamortized premium at June 30, 2012 and $2,665 at December 31, 2011)		182,268		211,854

Total notes payable	$	368,728	$	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 Facility have various customary restrictive covenants, all of which we were in compliance with at June 30, 2012.

At June 30, 2012, approximate principal maturities of our notes payable are as follows (amounts in thousands):

	Unsecured Notes Payable			Secured Notes Payable			Total
2012 (remainder)	$	-		$	22,584		$	22,584
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		$	182,268		$	368,728
Weighted average effective rate		5.9	%		5.1	%		5.5	%

Cash paid for interest totaled $11.5 million and $15.0 million for the six months ended June 30, 2012 and 2011, respectively. No interest was capitalized for the six months ended June 30, 2012 ($0.2 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 estimated 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.”

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

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. No further income will be allocated and no further distributions will be paid to these interests after March 31, 2012. During the three months ended June 30, 2011, we allocated a total of $0.2 million of income to these interests. During the six months ended June 30, 2012 and 2011, we allocated a total of $0.2 million and $0.5 million, respectively, of income to these interests and paid distributions to these interests totaling $0.6 million during each respective period.

Permanent Noncontrolling Interests

At June 30, 2012, the Permanent Noncontrolling Interests have ownership interests in Subsidiaries that own 15 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 and six months ended June 30, 2012, we allocated a total of $0.8 million and $1.4 million, respectively, in income to our Permanent Noncontrolling Interests. During the same periods in 2011, we allocated a total of $4.3 million and $8.5 million, respectively, in income to our Permanent Noncontrolling Interests. During the six months ended June 30, 2012 and 2011, we paid distributions to our Permanent Noncontrolling Interests totaling $2.1 million and $6.6 million, respectively.

As described more fully in Note 4, we increased Permanent Noncontrolling Interests during the six months ended June 30, 2012 a total of $8.2 million in connection with consolidating a partnership.

During the six months ended June 30, 2012, we acquired additional interests in the Subsidiaries for $1.0 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.

During the year ended December 31, 2011, we acquired Permanent Noncontrolling Interests in five Subsidiaries representing public limited partnerships pursuant to mergers described in Note 9, and interests in 14 additional subsidiaries, for an aggregate of $175.5 million in cash and our common shares.

8.	Public Storage Shareholders’ Equity

Cumulative Preferred Shares

At June 30, 2012 and December 31, 2011, we had the following series of Cumulative Preferred Shares outstanding:

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

					At June 30, 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
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
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
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		-		-
Series U	6/15/17		5.625	%		11,500		287,500		-		-
Total Cumulative Preferred Shares						122,893	$	3,072,325		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 June 30, 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.

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 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.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

In June 2012, we issued 11.5 million depositary shares each representing 1/1,000 of our 5.625% Cumulative Preferred Shares, Series U for gross proceeds of $287.5 million, and we incurred $9.1 million in issuance costs.

In the six months ended June 30, 2012, we redeemed our Series E, Series L, Series M and Series Y Cumulative Preferred Shares, at par. The aggregate redemption amount, before payment of accrued dividends, was $833.3 million.

In the three months ended June 30, 2012, we called for redemption our Series C, Series N, and Series W Cumulative Preferred Shares. The aggregate liquidation value (at par) of $415.6 million was reclassified as a liability at June 30, 2012. The Series N and Series C Cumulative Preferred Shares were redeemed in July 2012 and the Series W Cumulative Preferred Shares will be redeemed on August 6, 2012.

In April and May 2011, we issued 15.0 million depositary shares each representing 1/1,000 of our 6.500% Cumulative Preferred Shares, Series Q for gross proceeds of $375.0 million, and we incurred $11.3 million in issuance costs.

In May and June 2011, we redeemed our Series I Cumulative Preferred Shares, at par. The aggregate redemption amount, before payment of accrued dividends, was $517.5 million.

We recorded a $13.4 million and a $38.3 million EITF D-42 allocation of income from our common shareholders to the holders of our Cumulative Preferred Shares in the three and six months ended June 30, 2012, respectively, in connection with our preferred redemption activities ($15.9 million for the three and six months ended June 30, 2011).

Dividends

Common share dividends, including amounts paid to our restricted share unitholders, totaled $188.3 million ($1.10 per share) and $161.5 million ($0.95 per share), for the three months ended June 30, 2012 and 2011, respectively, and $376.4 million ($2.20 per share) and $297.4 million ($1.75 per share), for the six months ended June 30, 2012 and 2011, respectively. Preferred share dividends totaled $51.9 million and $58.6 million for the three months ended June 30, 2012 and 2011, respectively, and $107.0 million and $116.3 million for the six months ended June 30, 2012 and 2011, respectively.

9.	Related Party Transactions

The Hughes Family owns approximately 16.0% of our common shares outstanding at June 30, 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 six month periods ended June 30, 2012 and 2011, we received $0.3 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.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

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 former trustee, Mr. Hughes is indemnified for any litigation arising from this transaction pursuant to the indemnification agreements we have with each Public Storage trustee.

On June 30, 2011, we acquired interests in 18 additional limited partnerships from the Hughes Family. 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 June 30, 2012, Mr. Hughes has withdrawn as general partner in all 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 i) the Company and the recipient reach a mutual understanding of the key terms of the award, ii) the award has been authorized in accordance with the Company’s share grant approval procedures, iii) the recipient begins to be benefited from or adversely affected by changes in the market price of our stock, and iv) it is probable that any performance and service conditions will be met.

We amortize the grant-date fair value of awards (net of anticipated forfeitures) as compensation expense over the service period. The service period generally begins on the grant date and ends on the earlier of the vesting date or the date when the recipient would not forfeit unvested grants upon termination. Where i) all the requirements of a grant have been met, except that the Company and the recipient have not reached a mutual understanding of the key terms of the award, and ii) no future services are required following the grant date, the service period begins on the date services begin to be provided rather than on the grant date.

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

We have elected to use the straight-line attribution method with respect to awards that are earned solely based upon the passage of time and continued employment. Awards with performance conditions are amortized using the accelerated attribution method, with each vesting amortized separately over the individual vesting period. The employer portion of taxes is expensed as incurred.

Stock Options

Stock option exercise prices are equal to the closing trading price of our common shares on the date they are legally granted, vest over a three to five-year period, and expire ten years after the legal grant date. We use the Black-Scholes option valuation model to estimate the fair value of our stock options.

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

For the three and six months period ended June 30, 2012, we recorded $0.6 million and $1.3 million, respectively, in compensation expense related to stock options, as compared to $0.8 million and $1.5 million for the same periods in 2011.

During the six months ended June 30, 2012, 35,000 stock options were granted, 223,019 options were exercised and 27,400 options were forfeited. A total of 2,375,647 stock options were outstanding at June 30, 2012 (2,591,066 at December 31, 2011).

Restricted Share Units

RSUs vest ratably over a three to eight-year period from the date they are legally granted. The grantee receives additional compensation, classified as dividends paid, equal to the per-share dividends received by common shareholders for each outstanding RSU. When RSUs are forfeited, any dividends previously paid on such forfeited RSUs are expensed. When RSUs vest, the grantee receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax deposits, equal to the vesting-date fair value of the withheld shares, made by the Company to satisfy the employee’s statutory tax liabilities arising from the vesting.

The fair value of our RSUs is determined based upon the applicable closing trading price of our common shares.

During the six months ended June 30, 2012, 149,150 RSUs were granted, 43,772 RSUs were forfeited and 128,853 RSUs vested. This vesting resulted in the issuance of 81,710 common shares. In addition, tax deposits totaling $6.4 million were made on behalf of employees in exchange for 47,143 common shares withheld upon vesting.

At June 30, 2012, 678,024 RSUs were outstanding (701,499 at December 31, 2011). A total of $5.4 million and $10.0 million in RSU expense (including employer taxes incurred upon vesting) was recorded for the three and six months ended June 30, 2012, respectively, as compared to $6.0 million and $10.3 million for the same periods in 2011.

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

PUBLIC STORAGE

CONDENSED NOTES TO FINANCIAL STATEMENTS

June 30, 2012

(Unaudited)

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.

Domestic Self-Storage Segment

The Domestic Self-Storage Segment includes the operations of the 2,055 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 June 30, 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

June 30, 2012

(Unaudited)

For the three months ended June 30, 2012

	Domestic Self-Storage		European Self-Storage		Commercial		Other Items Not Allocated to Segments		Total
	(Amounts in thousands)
Revenues:
Self-storage facilities	$	420,466	$	-	$	-	$	-	$	420,466
Ancillary operations		-		-		3,638		28,095		31,733
Interest and other income		-		4,960		-		580		5,540
		420,466		4,960		3,638		28,675		457,739

Expenses:
Cost of operations:
Self-storage facilities		129,355		-		-		-		129,355
Ancillary operations		-		-		1,216		8,565		9,781
Depreciation and amortization		87,850		-		683		-		88,533
General and administrative		-		-		-		12,414		12,414
Interest expense		-		-		-		5,067		5,067
		217,205		-		1,899		26,046		245,150

Income from continuing operations before equity in earnings of unconsolidated real estate entities, foreign currency exchange loss, and gain on real estate sales		203,261		4,960		1,739		2,629		212,589

Equity in earnings of unconsolidated real estate entities		385		7,480		731		-		8,596
Foreign currency exchange loss		-