Public Storage (Form: 10-Q, Received: 05/01/2019 16:59:45)

PUBLIC STORAGE

BALANCE SHEETS

(Amounts in thousands, except share data)


	March 31,		December 31,
	2019		2018
ASSETS		(Unaudited)

Cash and equivalents	$	217,973	$	361,218
Real estate facilities, at cost:
Land		4,080,301		4,047,982
Buildings		11,457,059		11,248,862
		15,537,360		15,296,844
Accumulated depreciation		(6,255,475)		(6,140,072)
		9,281,885		9,156,772
Construction in process		213,785		285,339
		9,495,670		9,442,111

Investments in unconsolidated real estate entities		784,314		783,988
Goodwill and other intangible assets, net		210,459		209,856
Other assets		166,600		131,097
Total assets	$	10,875,016	$	10,928,270


LIABILITIES AND EQUITY

Notes payable	$	1,406,150	$	1,412,283
Accrued and other liabilities		374,245		371,259
Total liabilities		1,780,395		1,783,542

Commitments and contingencies (Note 12)

Equity:
Public Storage shareholders’ equity:
Preferred Shares, $0.01 par value, 100,000,000 shares authorized,
161,000 shares issued ( in series) and outstanding, ( 161,000 at
December 31, 2018), at liquidation preference		4,025,000		4,025,000
Common Shares, $0.10 par value, 650,000,000 shares authorized,
174,215,292 shares issued and outstanding ( 174,130,881 shares at
December 31, 2018)		17,422		17,413
Paid-in capital		5,708,699		5,718,485
Accumulated deficit		(615,329)		(577,360)
Accumulated other comprehensive loss		(65,971)		(64,060)
Total Public Storage shareholders’ equity		9,069,821		9,119,478
Noncontrolling interests		24,800		25,250
Total equity		9,094,621		9,144,728
Total liabilities and equity	$	10,875,016	$	10,928,270

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF INCOME

(Amounts in thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended March 31,
	2019		2018

Revenues:
Self-storage facilities	$	650,408	$	631,537
Ancillary operations		38,630		38,387
		689,038		669,924

Expenses:
Self-storage cost of operations		193,656		182,187
Ancillary cost of operations		10,545		10,640
Depreciation and amortization		121,941		117,979
General and administrative		19,503		31,520
Interest expense		8,143		8,107
		353,788		350,433

Interest and other income		6,965		5,544
Equity in earnings of unconsolidated real estate entities		17,672		30,795
Foreign currency exchange gain (loss)		7,791		(11,818)
Gain on sale of real estate		-		424
Net income		367,678		344,436
Allocation to noncontrolling interests		(1,157)		(1,439)
Net income allocable to Public Storage shareholders		366,521		342,997
Allocation of net income to:
Preferred shareholders - distributions		(55,012)		(54,081)
Preferred shareholders - redemptions (Note 8)		(8,533)		-
Restricted share units		(1,233)		(1,097)
Net income allocable to common shareholders	$	301,743	$	287,819
Net income per common share:
Basic	$	1.73	$	1.66
Diluted	$	1.73	$	1.65

Basic weighted average common shares outstanding		174,177		173,892
Diluted weighted average common shares outstanding		174,376		174,148

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)


	For the Three Months Ended March 31,
	2019		2018

Net income	$	367,678	$	344,436
Other comprehensive income (loss):
Aggregate foreign currency exchange gain (loss)		5,880		(7,605)
Adjust for aggregate foreign currency exchange
(gain) loss included in net income		(7,791)		11,818
Other comprehensive (loss) income		(1,911)		4,213
Total comprehensive income		365,767		348,649
Allocation to noncontrolling interests		(1,157)		(1,439)
Comprehensive income allocable to
Public Storage shareholders	$	364,610	$	347,210

See accompanying notes.

PUBLIC STORAGE

STATEMENT OF EQUITY

Three Months Ended March 31, 2019

(Amounts in thousands, except share and per share amounts)

(Unaudited)



									Accumulated		Total
	Cumulative								Other		Public Storage
	Preferred		Common		Paid-in		Accumulated		Comprehensive		Shareholders’		Noncontrolling		Total
	Shares		Shares		Capital		Deficit		Loss		Equity		Interests		Equity
Balances at December 31, 2018	$	4,025,000	$	17,413	$	5,718,485	$	(577,360)	$	(64,060)	$	9,119,478	$	25,250	$	9,144,728
Issuance of 11,400 preferred shares (Note 8)		285,000		-		(8,277)		-		-		276,723		-		276,723
Redemption of 11,400 preferred shares (Note 8)		(285,000)		-		-		-		-		(285,000)		-		(285,000)
Issuance of common shares in connection with
share-based compensation (84,411 shares) (Note 10)		-		9		1,584		-		-		1,593		-		1,593
Cash paid in lieu of common shares, net of
share-based compensation expense (Note 10)		-		-		(3,093)		-		-		(3,093)		-		(3,093)
Contributions by noncontrolling interests		-		-		-		-		-		-		196		196
Net income		-		-		-		367,678		-		367,678		-		367,678
Net income allocated to noncontrolling interests		-		-		-		(1,157)		-		(1,157)		1,157		-
Distributions to equity holders:
Preferred shares (Note 8)		-		-		-		(55,012)		-		(55,012)		-		(55,012)
Noncontrolling interests		-		-		-		-		-		-		(1,803)		(1,803)
Common shares and restricted share units
($2.00 per share)		-		-		-		(349,478)		-		(349,478)		-		(349,478)
Other comprehensive loss (Note 2)		-		-		-		-		(1,911)		(1,911)		-		(1,911)
Balances at March 31, 2019	$	4,025,000	$	17,422	$	5,708,699	$	(615,329)	$	(65,971)	$	9,069,821	$	24,800	$	9,094,621

See accompanying notes.

PUBLIC STORAGE

STATEMENT OF EQUITY

Three Months Ended March 31, 2018

(Amounts in thousands, except share and per share amounts)

(Unaudited)



									Accumulated		Total
	Cumulative								Other		Public Storage
	Preferred		Common		Paid-in		Accumulated		Comprehensive		Shareholders’		Noncontrolling		Total
	Shares		Shares		Capital		Deficit		Loss		Equity		Interests		Equity
Balances at December 31, 2017	$	4,025,000	$	17,385	$	5,648,399	$	(675,711)	$	(75,064)	$	8,940,009	$	24,360	$	8,964,369
Issuance of common shares in connection with
share-based compensation		-		8		959		-		-		967		-		967
Share-based compensation expense, net of cash
paid in lieu of common shares		-		-		5,909		-		-		5,909		-		5,909
Contributions by noncontrolling interests		-		-		-		-		-		-		703		703
Net income		-		-		-		344,436		-		344,436		-		344,436
Net income allocated to noncontrolling interests		-		-		-		(1,439)		-		(1,439)		1,439		-
Distributions to equity holders:
Preferred shares (Note 8)		-		-		-		(54,081)		-		(54,081)		-		(54,081)
Noncontrolling interests		-		-		-		-		-		-		(1,715)		(1,715)
Common shares and restricted share units
($2.00 per share)		-		-		-		(349,011)		-		(349,011)		-		(349,011)
Other comprehensive income (Note 2)		-		-		-		-		4,213		4,213		-		4,213
Balances at March 31, 2018	$	4,025,000	$	17,393	$	5,655,267	$	(735,806)	$	(70,851)	$	8,891,003	$	24,787	$	8,915,790

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)


	For the Three Months Ended March 31,
	2019		2018
Cash flows from operating activities:
Net income	$	367,678	$	344,436
Adjustments to reconcile net income to net cash flows
from operating activities:
Gain on real estate investment sales		-		(424)
Depreciation and amortization		121,941		117,979
Equity in earnings of unconsolidated real estate entities		(17,672)		(30,795)
Distributions from retained earnings of unconsolidated
real estate entities		15,435		12,649
Foreign currency exchange (gain) loss		(7,791)		11,818
Share-based compensation expense		6,664		15,978
Other		(12,671)		(13,122)
Total adjustments		105,906		114,083
Net cash flows from operating activities		473,584		458,519
Cash flows from investing activities:
Payments for capital expenditures to maintain real estate facilities for:
Costs incurred during the period		(25,428)		(13,749)
Costs incurred in previous periods		(8,173)		(9,859)
Payments for development and expansion of real estate facilities for:
Costs incurred during the period		(20,163)		(35,017)
Costs incurred in previous periods		(59,982)		(40,198)
Acquisition of real estate facilities and intangible assets		(79,499)		(18,024)
Proceeds from sale of real estate investments		-		1,947
Net cash flows from investing activities		(193,245)		(114,900)
Cash flows from financing activities:
Repayments on notes payable		(467)		(440)
Issuance of preferred shares		276,723		-
Issuance of common shares		1,593		967
Redemption of preferred shares		(285,000)		-
Cash paid upon vesting of restricted share units		(9,757)		(10,069)
Contributions by noncontrolling interests		196		703
Distributions paid to Public Storage shareholders		(404,490)		(403,092)
Distributions paid to noncontrolling interests		(1,803)		(1,715)
Net cash flows from financing activities		(423,005)		(413,646)
Net cash flows from operating, investing, and financing activities		(142,666)		(70,027)
Net effect of foreign exchange translation		50		(25)
Decrease in cash, equivalents, and restricted cash	$	(142,616)	$	(70,052)

See accompanying notes.

PUBLIC STORAGE

STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	For the Three Months Ended March 31,
	2019		2018

Cash, equivalents, and restricted cash at beginning of the period:
Cash and equivalents	$	361,218	$	433,376
Restricted cash included in other assets		22,801		22,677
	$	384,019	$	456,053

Cash, equivalents, and restricted cash at end of the period:
Cash and equivalents	$	217,973	$	363,030
Restricted cash included in other assets		23,430		22,971
	$	241,403	$	386,001

Supplemental schedule of non-cash investing and
financing activities:

Costs incurred during the period remaining unpaid at period end for:
Capital expenditures to maintain real estate facilities	$	(4,777)	$	(10,595)
Construction or expansion of real estate facilities		(41,798)		(40,163)
Accrued and other liabilities		46,575		50,758

Real estate acquired in exchange for assumption of notes payable		(1,817)		-
Notes payable assumed in connection with acquisition of real estate		1,817		-

Other disclosures:

Foreign currency translation adjustment:
Real estate facilities, net of accumulated depreciation		-		(256)
Investments in unconsolidated real estate entities		1,911		(3,935)
Notes payable		(7,741)		11,771
Accumulated other comprehensive gain (loss)		5,880		(7,605)

See accompanying notes.

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

1. Description of the Business

Public Storage (referred to herein as “the Company ,” “we ,” “us ,” or “our”), a Maryland real estate investment trust (“REIT”), was organized in 1980. Our principal business activities include the 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, ancillary activities such as merchandise sales and tenant reinsurance to the tenants at our self-storage facilities, as well as the acquisition and development of additional self-storage space.

At March 31, 2019 , we have direct and indirect equity interests in 2, 4 44 self-storage facilities (with approximately 1 6 4 million net rentable square feet) located in 38 states in the United States (“U.S.”) operating under the “Public Storage” name. We also have a n approximate 35 % interest in Shurgard Self Storage SA (“ Shurgard Europe ”) , which owns 2 31 self-storage facilities (with approximately 1 3 million net rentable square feet) located in seven Western European countries, all operating under the “Shurgard” name. We also have direct and indirect eq uity interests in approximately 29 million net rentable square feet of commercial space located in seven states in the U.S. primarily owned and operated by PS Business Parks, Inc. (“PSB”) under the “PS Business Parks” name. At March 31, 2019 , we have an approximate 42% common equity interest in PSB.

Disclosures of the number and square footage of facilities, as well as the number and coverage of tenant reinsurance policies (Note 1 2 ) are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the Public Company Accounting Oversight Board (U.S.).

2. Summary of Significant Accounting Policies

Basis of Presentation

We have prepared the accompanying interim financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) as set forth in the Accounting Standards Codification of the Financial Accounting Standards Board (“FASB”), and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”). In our opinion, the interim financial statements presented herein reflect all adjustments, of a normal recurring nature, that are necessary to fairly present the interim financial statements. Because they do not include all of the disclosures required by GAAP for complete annual financial statements, these 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, 201 8 .

Certain amounts previously reported in our March 31, 2018 financial statements have been reclassified to conform to the March 31, 2019 presentation, including separate presentation on our Statements of Cash Flows of our cash payments for real estate investments between cash paid for amounts incurred during the current period and amounts inc urred during previous periods.

Consolidation and Equity Method of Accounting

We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or the equity holders as a group do not have a controlling financial interest. We consolidate VIEs when we have (i) the power to direct the activities most significantly impacting economic performance, and (ii) either the obligation to absorb losses or the right to receive benefits from the VIE. We have no involvement with any material VIEs. We consolidate all other entities when we control them through voting shares or contractual rights. The entities we consolidate, for the period in which the reference applies, are referred to collectively as the “Subsidiaries,” and we eliminate intercompany transactions and balances.

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

We account for our investments in entities that we do not consolidate but 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 ,” eliminating intra-entity profits and losses and amortizing any differences between the cost of our investment and the underlying equity in net assets against equity in earnings as if the Unconsolidated Real Estate Entity were a consolidated subsidiary. Equity in earnings of unconsolidated real estate entities represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities.

When we begin consolidating an entity, we reflect our preexisting equity interest at book value . All changes in consolidation status are reflected prospectively.

Collectively, at March 31, 2019 , the Company and the Subsidiaries own 2,4 44 self-storage facilities and three commercial facilities in the U.S. At March 31, 2019 , the Unconsolidated Real Estat e Entities are comprised of PSB and Shurgard Europe.

Use of Estimates

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

Income Taxes

We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income each year, and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all 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 uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions. As of March 31, 2019 , we had no tax benefits that were not recognized.

Real Estate Facilities

Real estate facilities are recorded at cost. We capitalize all costs incurred to acquire, develop, construct, renovate and improve facilities, including interest and property taxes incurred during the construction period. We allocate the net acquisition cost of acquired real estate facilities to the underlying land, buildings, and identified intangible assets based upon their respective individual estimated fair values.

Costs associated with dispositions of real estate, as well as repairs and maintenance costs, are expensed as incurred. We depreciate buildings and improvements on a straight-line basis over estimated useful lives ranging generally between 5 to 25 years.

When we sell a full or partial interest in a real estate facility without retaining a controlling interest following sale, we recognize a gain or loss on sale as if 100% of the property was sold at fair value. If we retain

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

a controlling interest following the sale, we record a noncontrolling interest for the book value of the partial interest sold, and recognize additional paid-in capital for the difference between the consideration received and the partial in terest at book value.

Other Assets

Other assets primarily consist of rents receivable from our tenants, prepaid expenses , restricted cash and right-to-use assets . S ee “Recent Accounting Pronouncements and Guidance ” below.

Accrued and Other Liabilities

Accrued and other liabilities consist primarily of rents prepaid by our tenants, trade payables, property tax accruals, accrued payroll, accrued tenant reinsurance losses, lease liabilities, and contingent loss accruals when probable and estimable . S ee “Recent Accounting Pronouncements and Guidance” below. We believe the fair value of our accrued and other liabilities approximates book value, due primarily to the short period until repayment. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure.

Cash Equivalents, Restricted Cash, Marketable Securities and Other Financial Instruments

Cash equivalents represent highly liquid financial instruments such as money market funds with daily liquidity or short-term commercial paper or treasury securities maturing within three months of acquisition. Cash and equivalents which are restricted from general corporate use are included in other assets. We believe that the book value of all such financial instruments for all periods presented approximates fair value, due to the short period to maturity.

Fair Value

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. Our estimates of fair value involve considerable judgment and are not necessarily indicative of the amounts that could be realized in current market exchanges.

We estimate the fair value of our cash and equivalents, marketable securities, other assets, debt, and other liabilities by discounting the related future cash flows at a rate based upon quoted interest rates for securities that have similar characteristics such as credit quality and time to maturity. S uch quoted interest rates are referred to generally as “Level 2” inputs.

We use significant judgment to estimate fair values of investments in real estate, goodwill, and other intangible assets. In estimating their values, we consider significant unobservable inputs such as market prices of land, market capitalization rates, expected returns, earnings multiples, projected levels of earnings, costs of construction, and functional depreciation. These inputs are referred to generally as “Level 3” inputs.

Currency and Credit Risk

Financial instruments that are exposed to credit risk consist primarily of cash and equivalents, certain portions of other assets including rents receivable from our tenants and restricted cash. Cash equivalents we invest in are either money market funds with a rating of at least AAA by Standard & Poor’s, commercial paper that is rated A1 by Standard & Poor’s or deposits with highly rated commercial banks.

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

At March 31, 2019 , due primarily to our investment in Shurgard Europe (Note 4) and our notes payable denominated in Euros (Note 6), our operating results 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, the “Shurgard” trade name, acquired customers in place, and leasehold interests in land.

Goodwill totaled $174.6 million at March 31, 2019 and December 31, 2018 . The “Shurgard” trade name, which is used by Shurgard Europe pursuant to a fee-based licensing agreement, has a book value of $18.8 million at March 31, 2019 and December 31, 201 8 . Goodwill and the “Shurgard” trade name have indefinite lives and are not amortized.

Acquired customers in place and leasehold interests in land are finite-lived assets and are amortized relative to the benefit of the customers in place or the benefit to land lease expense to each period. At March 31, 2019 , these intangibles had a net book value of $ 1 7.1 million ( $ 16 .5 million at December 31, 2018 ). Accumulated amortization totaled $ 26 . 8 million at March 31, 2019 ( $28 . 9 million at December 31, 201 8 ), and amortization expense of $ 3.9 million and $ 5 . 0 million was recorded in the three months ended March 31, 2019 and 201 8 , respectively. The estimated future amortization expense for our finite-lived intangible assets at March 31, 2019 is approximately $ 8 . 6 million in the remainder of 201 9 , $ 3 . 6 million in 20 20 and $ 4 . 9 million thereafter. During the three months ended March 31, 2019 , intangibles increased $ 4 . 5 million in connection with the acquisition of self-storage facilities (Note 3).

Evaluation of Asset Impairment

We evaluate our real estate and finite-lived intangible assets for impairment each quarter. If there are indicators of impairment and we determine that the asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal.

We evaluate our investments in unconsolidated real estate entities for impairment on a quarterly basis. We record an impairment charge to the extent the carrying amount exceeds estimated fair value, when we believe any such shortfall is other than temporary.

We evaluate goodwill for impairment annually and whenever relevant events, circumstances and other related factors indicate that fair value of the related reporting unit may be less than the carrying amount. If we determine that the fair value of the reporting unit exceeds the aggregate carrying amount, no impairment charge is recorded. Otherwise, we record an impairment charge to the extent the carrying amount of the goodwill exceeds the amount that would be allocated to goodwill if the reporting unit were acquired for estimated fair value.

We evaluate other indefinite-lived intangible assets, such as the “Shurgard” trade name for impairment at least annually and whenever relevant events, circumstances and other related factors indicate that the fair value is less than the carrying amount. When we conclude that it is likely that the asset is not impaired, we do not record an impairment charge and no further analysis is performed. Otherwise, we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value.

No impairments were recorded in any of our evaluations for any period presented herein.

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

Revenue and Expense Recognition

Revenues from self-storage facilities, which are primarily composed of rental income earned pursuant to month-to-month leases, as well as associated late charges and administrative fees, are recognized as earned. Promotional discounts reduce rental income over the promotional period, which is generally one month. Ancillary revenues and interest and other income are recognized when earned.

We accrue for property tax expense based upon actual amounts billed and, in some circumstances, estimates when bills or assessments have not been received from the taxing authorities. If these estimates are incorrect, the timing and amount of expense recognition could be incorrect. Cost of operations (including advertising expenditures), general and administrative expense, and interest expense are expensed as incurred.

Foreign Currency Exchange Translation

The local currency (primarily the Euro) is the functional currency for our interests in foreign operations. The related balance sheet amounts are translated into U.S. Dollars at the exchange rates at the respective financial statement date, while amounts on our statements of income are translated at the average exchange rates during the respective period. When financial instruments denominated in a currency other than the U.S. Dollar are expected t o be settled in cash in the fore seeable future, the impact of changes in the U.S. Dollar equivalent are reflected in current earnings. The Euro was translated at exchange rates of approximately 1. 1 22 U.S. Dollars per Euro at March 31, 2019 ( 1. 1 4 4 at December 31, 201 8 ), and average exchange rates of 1. 1 3 6 and 1. 229 for the three months ended March 31, 2019 and 201 8 , 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

Total comprehensive income represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period. The aggregate foreign currency exchange gains and losses reflected on our statements of comprehensive income are comprised primarily of foreign currency exchange gains and losses on our investment in Shurgard Europe and our unsecured notes denominated in Euros.

Recent Accounting Pronouncements and Guidance

In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified-retrospective approach to adoption and became effective for interim and annual periods beginning on January 1, 2019. In July 2018, the FASB further amended this standard to allow for a new transition method that offers the option to use the effective date as the date of initial application and not adjust the comparative-period financial information. We adopted the new standard effective January 1, 2019, using the new transition method, recording a total of $38.7 million in right of use assets, reflected in other assets, and substantially the same amount in lease liabilities, reflected in accrued and other liabilities, for leases where we are the lessee (principally ground leas es and office leases) . The lease liabilities are recognized based on the present value of the remaining lease payments for each operating lease using each respective remaining lease term and a corresponding estimated incremental borrowing rate. We estimated the incremental borrowing rate primarily by reference to average yield spread on debt issuances by companies of a similar credit rating as us, and the treasury yields as of January 1, 2019. We had no material amount of leases covered by the standard where we are the lessor (principally our storage leases) because substantially all of such leases are month to month. For leases where we are the lessee or the lessor, we applied (i) the package of practical expedients to not reassess prior conclusions related to contracts that are or that contain leases, lease classification and initial direct costs, (ii) the hindsight practical expedient to determine the lease term

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

and in assessing impairment of the right of use assets, and (iii) the easement practical expedient to not assess whether existing or expired land easements that were not previously accounted for as leases under ASC 840 are or contain a lease under this new standard. In addition, for leases where we are the lessee, we also elected to (a) not apply the new standard to our leases with an original term of 12 months or less, and (b) not separate lease and associated non-lease components.

Net Income per Common Share

Net income is allocated to (i) noncontrolling interests based upon their share of the net income of the Subsidiaries, (ii) preferred shareholders, to the extent redemption cost exceeds the related original net issuance proceeds (an “EITF D-42 allocation”), and (iii) the remaining net income is allocated to each of our equity securities based upon the dividends declared or accumulated during the period, combined with participation rights in undistributed earnings.

Basic and diluted net income per common share are each calculated based upon net income allocable to common shareholders presented on the face of our income statement, divided by (i) in the case of basic net income per common share, weighted average common shares, and (ii) in the case of diluted income per share, weighted average common shares adjusted for the impact, if dilutive, of stock options outstanding (Note 10). The following table reconciles from basic to diluted common shares outstanding (amounts in thousands) :


	For the Three Months Ended March 31,
	2019		2018

Weighted average common shares and equivalents
outstanding:
Basic weighted average common
shares outstanding		174,177		173,892
Net effect of dilutive stock options -
based on treasury stock method		199		256
Diluted weighted average common
shares outstanding		174,376		174,148

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

3. Real Estate Facilities

Activity in real estate facilities during the three months ended March 31, 2019 is as follows:



	Three Months Ended
	March 31, 2019
	(Amounts in thousands)
Operating facilities, at cost:
Beginning balance	$	15,296,844
Costs incurred for capital expenditures to maintain real estate facilities		30,205
Acquisitions		76,796
Developed or expanded facilities opened for operation		133,515
Ending balance		15,537,360
Accumulated depreciation:
Beginning balance		(6,140,072)
Depreciation expense		(115,403)
Ending balance		(6,255,475)
Construction in process:
Beginning balance		285,339
Costs incurred for development and expansion of real estate facilities		61,961
Developed or expanded facilities opened for operation		(133,515)
Ending balance		213,785
Total real estate facilities at March 31, 2019	$	9,495,670

Durin g the three months ended March 31, 2019 , we acquired 1 2 self-storage facilities ( 768,000 net rentable square feet), for a total cost of $ 81.3 million, consisting of $ 79.5 million in cash and the assumption of $1.8 million in mortgage notes. Approximately $ 4 . 5 m illion of the total cost was allocated to intangible assets. We completed development and redevelopment activities costing $ 133 . 5 million during the three months ended March 31, 2019 , adding 1.6 million net rentable square feet of self-storage space. Construction in process at March 31, 2019 consists of projects to develop new self-storage facilities and expand existing self-storage facilities.

During the three months ended March 31, 2019, we paid a total of $80.1 million with respect to the development and expansion of real es tate facilities, including $60.0 million to repay amounts a ccrued at December 31, 2018 ( $75 .2 million during the three months ended March 31, 2018, including $ 40 .2 million to repay amounts accrued at December 31, 2017). Of the $62.0 million in costs incurred during the three mo nths ended March 31, 2019, $41.8 million remains unpaid at March 31, 2019.

During the three months ended March 31, 2019, we paid a total of $33.6 million with respect to capital expenditures to maintain real estate facilities, including $ 8.2 million to repay amounts accrued at December 31, 2018 ( $23.6 million during the three months ended March 31, 2018, including $ 9 .9 million to repay amounts accrued at December 31, 2017). Of the $30.2 million in costs incurred during the three months ended March 31, 2019, $ 4.8 million remains unpaid at March 31 , 2019.

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

4. Investments in Unconsolidated Real Estate Entities

The following table sets forth our investments in, and equity in earnings of, the Unconsolidated Real Estate Entities (amounts in thousands):


	Investments in Unconsolidated Real Estate Entities at
	March 31, 2019		December 31, 2018

PSB	$	433,066	$	434,533
Shurgard Europe		351,248		349,455
Total	$	784,314	$	783,988


	Equity in Earnings of Unconsolidated Real Estate Entities for the
	Three Months Ended March 31,
	2019		2018

PSB	$	13,720	$	23,831
Shurgard Europe		3,952		6,964
Total	$	17,672	$	30,795

Investment in PSB

PSB is a REIT traded on the New York Stock Exchange. We have an approximate 42% common equity interest in PSB as of March 31, 2019 and December 31, 2018 , comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units (“LP Units”) in an operating partnership controlled by PSB. The LP 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, 2019 ( $1 56.83 p er share of PSB common stock), the shares and units we owned had a market value of approximately $ 2. 3 billion. At March 31, 2019 , the adjusted tax basis of our investment in PSB approximates book value.

During the three months ended March 31, 2019 and 2018, we received cash distributions from PSB totaling $ 15.2 million and $ 12.3 million, respectively .

At March 31, 2019, our pro-rata investment in PSB’s real estate assets included in investment in real estate entities exceeds our pro-rata share of the underlying amounts on PSB’s balance sheet by approximately $ 32 . 1 million ( $ 32 . 3 million at December 31, 2018 ). This differential (the “PSB Basis Differential”) is being amortized as a reduction to equity in earnings of the Unconsolidated Real Estate Entities. Such amortization totaled approximately $ 0.2 million and $ 0. 4 million during the three months ended March 31, 2019 and 2018 , respectively .

Our equity in earnings of PSB is comprised of our equity interest in PSB’s earnings , less amortization of the PSB Basis Differential. PSB’s filings and selected financial information can be accessed through the SEC, and on PSB’s website, www.psbusinessparks.com . Information on this website is not incorporated by reference herein and is not a part of this Quarterly Report on Form 10-Q.

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

Investment in Shurgard Europe

On October 15, 2018, Shurgard Europe completed an initial global offering (the “Offering”) of its common shares, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard Europe issued 25,000,000 of its shares to third parties at a price of €23 per share. Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31,268,459 shares, decreased from 49% to approximate ly 35 % as a result of the Offering.

Based upon the closing price at March 31, 2019 ( € 29.43 per share of SHUR common stock, at 1.122 exchange rate of US Dollars to the Euro), the shares we owned had a market value of approximately $ 1.0 b illion .

Our equity in earnings of Shurgard Europe is comprised of our equity share of Shurgard Europe’s net income, plus our equity share of the trademark license fees that Shurgard Europe pays to us for the use of the “Shurgard” trademark. The remaining license fees we receive from Shurgard Europe are classified as interest and other income on our income statement.

We present our equity share of trademark license fees collected from Shurgard Europe, totaling $ 0.2 million and $ 0. 3 million in the three months ended March 31, 2019 and 2018, respectively , under “distributions from retained earnings of unconsolidated real estate entities” on our statements of cash flows.

Changes in foreign currency exchange rates de creased our investment in Shurgard Europe by approximately $ 1.9 million in the three months ended March 31, 2019 and in creased it by $ 3.9 million in the three months ended March 31, 201 8 .

For all periods presented, we owned 31,268,459 shares of Shurgard Europe representing our approximate ly 35 % and 49% equity share of Shurgard’s shares outstanding for the three months ended March 31, 2019 and 2018, respectively. Our equity in earnings of Shurgard Europe is comprised of our e q uity share of Shurgard Europe’s net income and trademark license fees that Shurgard Europe pays to us for the use of the “Shurgard” trademark. The remaining license fees we receive are classified as interest and other income on our income statement .

Shurgard Europe’s public filings and publicly reported information can be obtained on its website, https://corporate.shurgard.eu and on the website of the Luxembourg Stock Exchange, http://www.bourse.lu . Information on these websites is not incorporated by reference herein and is not a part of this Quarterly Report on Form 10-Q.

5. Credit Facility

We have a revolving credit a greement (the “Credit Facility”) with a $500 million borrowing limit, which expires on March 31 , 2020 . Amounts drawn on the Credit Facility bear annual interest at rates ranging from LIBOR plus 0.850% to LIBOR plus 1.450% depending upon the ratio of our Total Indebtedness to Gross Asset Value (as defined in the Credit Facility) (LIBOR plus 0.850% at March 31, 2019 ). We are also required to pay a quarterly facility fee ranging from 0.080% per annum to 0.250% per annum depending upon the ratio of our Total Indebtedness to our Gross Asset Value ( 0.080% per annum at March 31, 2019 ). At March 31, 2019 and May 1 , 201 9 , we had no outstanding borrowings under this Credit Facility. We had undrawn standby letters of credit, which reduce our borrowing capacity, totaling $15 . 9 million at March 31, 2019 ( $16.2 million at December 31, 201 8) . The Credit Facility has various customary restrictive covenants, all of which we were in compliance with at March 31, 2019 .

See Note 13 “S ubsequent Events ” .

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

6. Notes Payable

Our notes payable at March 31, 2019 and December 31, 2018 a re set forth in the tables below:



			Amounts at March 31, 2019
	Coupon	Effective				Unamortized		Book		Fair
	Rate	Rate		Principal	Costs			Value		Value
			($ amounts in thousands)
U.S. Dollar Denominated Unsecured Debt
Notes due September 2022	2.370%	2.483%	$	500,000	$	(1,815)	$	498,185	$	494,910
Notes due September 2027	3.094%	3.218%		500,000		(4,472)		495,528		488,470
				1,000,000		(6,287)		993,713		983,380

Euro Denominated Unsecured Debt
Notes due April 2024	1.540%	1.540%		112,186		-		112,186		113,768
Notes due November 2025	2.175%	2.175%		271,504		-		271,504		290,907
				383,690		-		383,690		404,675
Mortgage Debt , secured by 27
real estate facilities with a net
book value of $107.7 million	4.064%	4.024%		28,747		-		28,747		29,217

			$	1,412,437	$	(6,287)	$	1,406,150	$	1,417,272


	Amounts at
	December 31, 2018
		Book		Fair
		Value		Value
	($ amounts in thousands)
U.S. Dollar Denominated Unsecured Debt
Notes due September 2022	$	498,053	$	482,017
Notes due September 2027		495,396		469,055
		993,449		951,072

Euro Denominated Unsecured Debt
Notes due April 2024		114,449		115,964
Notes due November 2025		276,982		286,078
		391,431		402,042

Mortgage Debt		27,403		27,613

	$	1,412,283	$	1,380,727

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

U.S. Dollar Denominated Unsecured Debt

On September 18, 2017 , we issued, in a public offering, two tranches each totaling $ 500.0 million of U.S. Dollar denominated unsecured notes (the “U.S. Dollar Notes”). In connection with the offering, we incurred a total of $7.9 million in costs, which is reflected as a reduction in the principal amount and amortized, using the effective interest method, over the term of each respective note. Interest on the U.S. Dollar Notes is payable semi-annually on March 15 and September 15 of each year, commencing March 15, 2018.

The U.S. Dollar Notes have various financial covenants, all of which we were in compliance with at March 31, 2019 . Included in these covenants are ( a) a maximum Debt to Total Assets of 65% ( 4.0 % at March 31, 2019 ) and ( b) a minimum ratio of Adjusted EBITDA to Interest Expense of 1.5x ( 68.1 x for the twelve months ended March 31, 2019 ) as well as covenants limiting the amount we can encumber our properties with mortgage debt.

See Note 13 “ Subsequent Events ” .

Euro Denominated Unsecured Debt

Our euro denominated unsecured notes (the “Euro Notes”) are payable to institutional investors. The Euro Notes consist of two tranches, (i) €242.0 million issued on November 3, 2015 for $264.3 million in net proceeds upon converting the Euros to U.S. Dollars and (ii) €100.0 million issued on April 12, 2016 for $113.6 million in net proceeds upon converting the Euros to U.S. Dollars. Interest is payable semi-annually. The Euro Notes have various customary financial covenants, all of which we were in compliance with at March 31, 2019 .

We reflect changes in the U.S. Dollar equivalent of the amount payable, as a result of changes in foreign exchange rates as “ foreign currency exchange gain ( loss ) ” on our income statement ( a gain of $ 7.8 million for the three months ended March 31, 2019 , as compared to a loss of $1 1.8 million for the same period in 201 8 ) .

Mortgage Debt

Our non-recourse mortgage debt was assumed in connection with property acquisitions, and recorded at fair value with any premium or discount to the stated note balance amortized using the effective interest method.

During the three months ended March 31, 2019 , we assumed a mortgage note with a contractual value of $1.8 million and an interest rate of 3.9% , which approximated market rate, in connection with the acquisition of a real estate facility.

At March 31, 2019 , the related contractual interest rates are fixed, ranging between 3.2 % and 7.1% , and mature between January 20 2 2 and July 20 30 .

At March 31, 2019 , approximate principal maturities of our Notes Payable are as follows (amounts in thousands ):

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)


			At March 31, 2019			At December 31, 2018
Series	Earliest Redemption Date	Dividend Rate	Shares Outstanding	Liquidation Preference		Shares Outstanding	Liquidation Preference

			(Dollar amounts in thousands)
Series U	6/15/2017	5.625%	11,500	$	287,500	11,500	$	287,500
Series V	9/20/2017	5.375%	19,800		495,000	19,800		495,000
Series W	1/16/2018	5.200%	20,000		500,000	20,000		500,000
Series X	3/13/2018	5.200%	9,000		225,000	9,000		225,000
Series Y	3/17/2019	6.375%	-		-	11,400		285,000
Series Z	6/4/2019	6.000%	11,500		287,500	11,500		287,500
Series A	12/2/2019	5.875%	7,600		190,000	7,600		190,000
Series B	1/20/2021	5.400%	12,000		300,000	12,000		300,000
Series C	5/17/2021	5.125%	8,000		200,000	8,000		200,000
Series D	7/20/2021	4.950%	13,000		325,000	13,000		325,000
Series E	10/14/2021	4.900%	14,000		350,000	14,000		350,000
Series F	6/2/2022	5.150%	11,200		280,000	11,200		280,000
Series G	8/9/2022	5.050%	12,000		300,000	12,000		300,000
Series H	3/11/2024	5.600%	11,400		285,000	-		-
Total Preferred Shares			161,000	$	4,025,000	161,000	$	4,025,000

The holders of our Preferred Shares have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions. Except under certain conditions and as noted below, holders of the 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 ser ve on our board of trustees (our “Board”) until the arrearage has been cured. At March 31, 2019 , there were no dividends in arrears.

Except under certain conditions relating to the Company’s qualification as a REIT, the 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 Preferred Shares is redeemable at our option, in whole or in part, at $25.00 per depositary share, plus accrued and unpaid dividends. Holders of the Preferred Shares cannot require us to redeem such shares.

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

On March 11, 2019 , we issued 11. 4 million depositary shares, each representing 1/1 ,000 of a share of our 5.60 0% Series H Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $285 .0 million in gross proceeds, and we incurred $8. 3 million in issuance costs.

On March 28, 2019, we redeemed our 6.375 % Series Y Preferred Shares, at par. We recorded a n $ 8.5 million allocation of income from our common shareholders to the holders of o ur Preferred Shares in the three months ended March 31 , 201 9 in connection with this redemption.

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

Dividends

Common share dividends, including amounts paid to our restricted share unitholders, totaled $ 349 . 5 million ( $2.00 per share) and $ 34 9. 0 million ( $ 2 .0 0 per share) for the three months ended March 31, 2019 and 2018 , respectively . Preferred share dividends totaled $ 55.0 million an d $54 .1 million for the three months ended March 31, 2019 and 201 8 , respectively .

9 . Related Party Transactions

B. Wayne Hughes, our former Chairman and his family, including his daughter Tamara Hughes Gustavson and his son B. Wayne Hughes, Jr., who are both members of our Board, collectively own approximately 14.5 % of our common shares outstanding at March 31, 2019 .

At March 31, 2019 , B. Wayne Hughes and Tamara Hughes Gustavson together owned and controlle d 62 self -storage facilities in Canada. These facilities operate under the “Public Storage” tradename, which we license to the owners of these facilities for use in Canada on a roy alty-free, non-exclusive basis. We have no ownership interest in these facilities and we do not own or ope rate any facilities in Canada. If we chose to acquire or develop our own facilities in Canada, we would have to share the use of the “Public Storag e” name in Canada . We have a right of first refusal, subject to limitations, to acquire the stock or assets of the corporation engaged in the operation of these facilities if the ir owners agree to sell them. Our subsidiaries reinsure risks relating to loss of goods stored by customers in these facilities, and have received approximately $ 323 ,000 and $307 ,000 for three months ended March 31, 2019 and 2018 , respectively. Our right to continue receiving these premiums may be qualified.

10 . Share-Based Compensation

Under various share-based compensation plans and under terms established by our Board or a committee thereof, we grant non-qualified options to purchase the Company’s common shares, as well as restricted share units (“RSUs”), to trustees, officers, and key employees.

Stock options and RSUs are considered “granted” and “outstanding” 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, (iii) the recipient is affected by changes in the market price of our stock, and (iv) it is probable that any performance conditions will be met.

We amortize the grant-date fair value of awards as compensation expense over the service period, which begins on the grant date and ends generally on the vesting date. For awards that are earned solely upon the passage of time and continued service, the entire cost of the award is amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each vesting is amortized separately over each individual service period (the “accelerated attribution” method).

In amortizing share-based compensation expense, we do not estimate future forfeitures in advance. Instead, we reverse previously amortized share-based compensation expense with respect to grants that are forfeited in the period the employee terminates employment.

In February 2018, we announced that Ron Havner and John Reyes, our Chief Executive Officer and Chief Financial Officer, respectively, at the time, were retiring from their executive roles at the end of 2018 and would then serve only as Trustees of the Company. Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods during their service as Trustees. For financial reporting, the end of the service periods for previous stock option and RSU grants for these executives

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

changed from (i) the various vesting dates to (ii) December 31, 2018 when they retired. Accordingly, all remaining share-based compensation expense for these two executives was amortized in the year ended December 31, 2018.

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

Stock Options

Stock options vest over a three to five -year period, expire ten years after the grant date, and the exercise price is equal to the closing trading price of our common shares on the grant date. Employees cannot require the Company to settle their award in cash. 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 months ended March 31, 201 9 , we recorded $ 0.8 million in compensation expense related to stock options, as compared to $ 3 . 5 million for the same period in 201 8 . Amounts for the three months ended March 31, 201 8 include $ 1 .8 million in connection with the acceleration of amortization on grants as discussed above .

During the three months ended March 31, 2019 , 45 ,000 stock options were granted , 29,755 options were exercised and no options were forfeited. A total of 2, 4 36 , 1 67 stock options were outstanding at March 31, 2019 ( 2,420,922 at December 31, 2018 ) and have an average exercise price of $ 203.37 .

Restricted Share Units

RSUs generally vest over a five to eight -year period from the grant date. The grantee receives dividends for each outstanding RSU equal to the per-share dividends received by our common shareholders. We expense any dividends previously paid upon forfeiture of the related RSU. Upon vesting, the grantee receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax deposits made by the Company to satisfy the grantee’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 three months ended March 31, 201 9, 42,525 RSUs were granted, 3,764 RSUs were forfeited and 94,363 R SUs vested. This vesting resulted in the issuance of 54, 65 6 common shares. In addition, tax deposi ts totaling $ 9.8 million ( $10 . 1 mil lion for the same period in 2018 ) were made on behalf of employees in exchange for 39, 7 07 common shares withheld upon vesting. A total of 662,094 RSUs were outstanding at March 31, 2019 ( 717 , 696 at December 31, 20 18 ) .

A total of $ 6.8 million in RSU expense was recorded for the three months ended March 31, 2019 , respectively, which includes approximately $ 1.0 million i n employer taxes incurred upon vesting , as compared to $ 13 . 4 million for the same period in 2018 , which includes approximately $0. 9 million in employer taxes incurred upon vesting . Amounts for the three months ended March 31, 201 8 include $ 6 . 0 million in connection with the acceleration of amortization on grants to our CEO and CFO as discussed above .

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

1 1 . Segment Information

Our reportable segments reflect the significant components of our operations where discrete financial information is evaluated separately by our chief operating decision maker (“CODM”). We organize our segments based primarily upon the nature of the underlying products and services, as well as the drivers of profitability growth. The net income for each reportable segment included in the tables below are in conformity with GAAP and our significant accounting policies as denoted in Note 2. The amounts not attributable to reportable segments are aggregated under “other items not allocated to segments.”

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

Self-Storage Operations

The Self-Storage Operations segment reflects the rental operations from all self-storage facilities we own. Our CODM reviews the net operating income (“NOI”) of this segment, which represents the related revenues less cost of operations (prior to depreciation expense), in assessing performance and making resource allocation decisions. The presentation in the tables below sets forth the NOI of this segment, as well as the depreciation expense for this segment, which while reviewed by our CODM and included in net income, is not considered by the CODM in assessing performance and decision making. 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 Self-Storage Operations segment.

Ancillary Operations

The Ancillary Operations segment reflects the sale of merchandise and reinsurance of policies against losses to goods stored by our self-storage tenants, activities which are incidental to our primary self-storage rental activities. Our CODM reviews the NOI of these operations in assessing performance and making resource allocation decisions.

Investment in PSB

This segment represents our 42% equity interest in PSB, a publicly-traded REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office, and industrial space. PSB has a separate management team that makes its financing, capital allocation, and other significant decisions. In making resource allocation decisions with respect to our investment in PSB, the CODM reviews PSB’s net income, which is detailed in PSB’s periodic filings with the SE C . The segment presentation in the tables below includes our equity earnings from PSB.

Investment in Shurgard Europe

This segment represents our equity interest in Shurgard Europe, a publicly held company which owns and operates self-storage facilities located in seven countries in Western Europe. Shurgard Europe has a separate management team and board of trustees that makes its financing, capital allocation, and other significant decisions. In making resource allocation decisions with respect to our investment in Shurgard Europe, the CODM revie ws Shurgard Europe’s net income . The segment presentation below includes our equity earnings from Shurgard Europe.

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

Presentation of Segment Information

The following tables reconcile NOI (as applicable) and net income of each segment to our consolidated net income (amounts in thousands):


Three months ended March 31, 2019

	Self-Storage Operations		Ancillary Operations		Investment in PSB		Investment in Shurgard Europe		Other Items Not Allocated to Segments		Total
	(Amounts in thousands)
Revenues:
Self-storage operations	$	650,408	$	-	$	-	$	-	$	-	$	650,408
Ancillary operations		-		38,630		-		-		-		38,630
		650,408		38,630		-		-		-		689,038

Cost of operations:
Self-storage operations		193,656		-		-		-		-		193,656
Ancillary operations		-		10,545		-		-		-		10,545
		193,656		10,545		-		-		-		204,201

Net operating income:
Self-storage operations		456,752		-		-		-		-		456,752
Ancillary operations		-		28,085		-		-		-		28,085
		456,752		28,085		-		-		-		484,837

Other components of net income (loss):
Depreciation and amortization		(121,941)		-		-		-		-		(121,941)
General and administrative		-		-		-		-		(19,503)		(19,503)
Interest and other income		-		-		-		-		6,965		6,965
Interest expense		-		-		-		-		(8,143)		(8,143)
Equity in earnings of
unconsolidated real estate entities		-		-		13,720		3,952		-		17,672
Foreign currency exchange gain		-		-		-		-		7,791		7,791
Net income (loss)	$	334,811	$	28,085	$	13,720	$	3,952	$	(12,890)	$	367,678

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)


Three months ended March 31, 2018

	Self-Storage Operations		Ancillary Operations		Investment in PSB		Investment in Shurgard Europe		Other Items Not Allocated to Segments		Total
	(Amounts in thousands)
Revenues:
Self-storage operations	$	631,537	$	-	$	-	$	-	$	-	$	631,537
Ancillary operations		-		38,387		-		-		-		38,387
		631,537		38,387		-		-		-		669,924

Cost of operations:
Self-storage operations		182,187		-		-		-		-		182,187
Ancillary operations		-		10,640		-		-		-		10,640
		182,187		10,640		-		-		-		192,827

Net operating income:
Self-storage operations		449,350		-		-		-		-		449,350
Ancillary operations		-		27,747		-		-		-		27,747
		449,350		27,747		-		-		-		477,097

Other components of net income (loss):
Depreciation and amortization		(117,979)		-		-		-		-		(117,979)
General and administrative		-		-		-		-		(31,520)		(31,520)
Interest and other income		-		-		-		-		5,544		5,544
Interest expense		-		-		-		-		(8,107)		(8,107)
Equity in earnings of
unconsolidated real estate entities		-		-		23,831		6,964		-		30,795
Foreign currency exchange loss		-		-		-		-		(11,818)		(11,818)
Gain on sale of real estate		-		-		-		-		424		424
Net income (loss)	$	331,371	$	27,747	$	23,831	$	6,964	$	(45,477)	$	344,436

PUBLIC STORAGE

NOTES TO FINANCIAL STATEMENTS

March 31, 2019

(Unaudited)

1 2 . Commitments and Contingencies

Contingent Losses

We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.

Insurance and Loss Exposure

We carry property, earthquake, general liability, employee medical insurance and workers compensation coverage through internationally recognized insurance carriers, subject to deductibles. Our d educti ble for general liability is $2.0 million per occurrence. Our annual deductible for property loss is $25.0 million per occurrence. This deductible decreases to $5.0 million once we reach $35.0 million in aggregate losses for occurrences that exceed $5.0 million. Insurance carriers’ aggregate limits on these policies of $75.0 million for property losses and $102.0 million for general liability losses are higher than estimates of maximum probable losses 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 exceeded.

We reinsure a program that provides insurance to our customers from an independent third-party insurer. This program covers customer claims for losses to goods stored at our facilities as a result of specific named perils (earthquakes are not covered by this program), up to a maximum limit of $5,000 per storage unit. We reinsure all risks in this program, but purchase insurance to cover this exposure for a limit of $15 .0 million for losses in excess of $5.0 million per occurrence. We are subject to licensing requirements and regulations in several states. Customers participate in the program at their option. At March 31, 2019 , there were approximately 928 ,000 certificates held by our self- storage customers, representing aggregate coverage of approximately $3 . 0 billion .

Construction Commitments

We have construction commitments representing future expected payments for construction under contract totaling $ 9 9 . 1 m illion at March 31, 2019 . We expect to pay approximately $ 82 . 0 million in the remainder of 201 9 and $ 17 . 1 million in 20 20 for these construction commit ments.

13. Subsequent Events

Subsequent to March 31, 2019 , we acquired or were under contract to acquire (subject to customary closing conditions) ten self-storage facilities with 660 ,000 net rentable square feet, for $ 116 . 4 million.

On April 12, 2019, we completed a public offering of $500 million in aggregate principal amount of senior notes bearing interest at an annual rate of 3.385% maturing on May 1, 2029 . In connection with the offering, we incurred a total of $ 3.1 million in costs .

On April 19, 2019, we amended our $500 million revolving line of credit. This amendment ( i) extends the maturity date from March 31, 2020 to April 19 , 2024 , ( ii) decreases the current effective borrowing spread over LIBOR from 0.850% to 0.70% , and ( iii) decreases the current effective facility fee from 0.080% to 0.070% . All other terms remain substantially the same.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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,” “should,” “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. Factors and risks that may impact future results and performance include, but are not limited to, those described in Part 1, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2019 and in our other filings with the SEC including:

general risks associated with the ownership and operation of real estate, including changes in demand, risk related to development of self-storage facilities, 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 customers;

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, changes in tax laws, 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, taxes, our tenant reinsurance business and labor, and risks related to the impact of new laws and regulations;

risks of increased tax expense associated either with a possible failure by us to qualify as a real estate investment trust (“REIT”), or with challenges to the determination of taxable income for our taxable REIT subsidiaries;

risks due to a potential November 2020 statewide ballot initiative (or other equivalent actions) that could remove the protections of Proposition 13 with respect to our real estate and result in substantial increases in our assessed values and property tax bills in California;

changes in United States (“U.S.”) federal or state tax laws related to the taxation of REITs and other corporations;

security breaches or a failure of our networks, systems or technology could adversely impact our business , customer and employee relationships;

risks associated with the self-insurance of certain business risks, including property and casualty insurance, employee health insurance and workers compensation liabilities;

difficulties in raising capital at a reasonable cost;

delays and cost overruns on our development projects;

ongoing litigation and other legal and regulatory actions which may divert management’s time and attention, require us to pay damages and expenses or restrict the operation of our business; and

economic uncertainty due to the impact of war or terrorism.

These forward looking statements speak only as of the date of this report or as of the dates indicated in the statements. All of our forward-looking statements, including those in this report, are qualified in their entirety by this statement. We expressly disclaim any obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, new estimates, or other factors, events or circumstances after the date of these forward looking statements, except when expressly required by law. Given these risks and uncertainties, 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, neither as predictions of future events nor guarantees of future performance.

Critical Accounting Policies

Our MD&A discusses our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and are affected by our judgments, assumptions and estimates. The notes to our March 31, 2019 financial statements, primarily Note 2, summarize our significant accounting policies.

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 REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. 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, certain of our consolidated corporate subsidiaries have elected to be treated as “taxable REIT subsidiaries” for federal income tax purposes, which are taxable as regular corporations and subject to certain limitations on intercompany transactions. If tax authorities determine that amounts paid by our taxable REIT subsidiaries to us are not reasonable compared to similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. Such a penalty tax could have a material adverse impact on our net income.

Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows, and estimates of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.

Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, workers compensation claims, tenant reinsurance claims, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated.

Accounting for Acquired Real Estate Facilities: We estimate the fair values of the land, buildings and intangible assets acquired for purposes of allocating the purchase price. Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land transactions, and (iv) future cash flows from the real estate and the existing tenant base. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, gains and losses on sale of real estate assets, and real estate and intangible assets.

Overview

Our self-storage operations generate most of our net income, and we believe that our earnings growth is most impacted by the level of organic growth in our existing self-storage portfolio. Accordingly, a significant portion of management’s time is devoted to maximizing cash flows from our existing self-storage facilities.

Most of our facilities compete with other well-managed and well-located competitors and we are subject to general economic conditions, particularly those that affect the spending habits of consumers and moving trends. We believe that our centralized information networks, national telephone and online reservation system, the brand name “Public Storage,” and our economies of scale enable us to meet such challenges effectively.

In the last three years, there has been a marked increase in development of new self-storage facilities in many of the markets we operate in, due to the favorable economics of development which we have also taken advantage of. These newly developed facilities compete with many of the facilities we own, negatively impacting our occupancies, rental rates, and rental growth. This increase in supply has been most notable in Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, New York, and Portland.

We plan on growing organically as well as through the acquisition and development of new facilities and expanding our existing self-storage facilities. Since the beginning of 2013 through March 31, 2019, we acquired a total of 308 facilities with 21.4 million net rentable square feet from third parties for approximately $2.7 billion, and we opened newly developed and expanded self-storage space for a total cost of $1.4 billion , adding approximately 12.9 million net rentable square feet.

Subsequent to March 31, 2019, we acquired or were under contract to acquire (subject to customary closing conditions) ten self-storage facilities for $116.4 million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.

As of March 31, 2019, we had additional development and redevelopment projects to build approximately 3.9 million net rentable square feet at a total cost of approximately $512.4 million. We expect to continue to seek additional development projects; however, the level of such activity may be limited due to various constraints such as difficulty in finding available sites that meet our risk-adjusted yield expectations, as well as challenges in obtaining building permits for self-storage activities in certain municipalities.

We believe that our development and redevelopment activities generate favorable risk-adjusted returns over the long run. However, in the short run, our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, as well as the related construction and development overhead expenses included in general and administrative expense. We believe the level of dilution incurred in 2018 and the first quarter of 2019 will continue at similar levels in the remainder of 2019.

On October 15, 2018, Shurgard Self Storage SA (“Shurgard Europe”) completed an initial global offering (the “Offering”) of its common shares, and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard Europe issued 25.0 million of its common shares to third parties at a price of €23 per share, for €575 million in gross proceeds. The gross proceeds were used to repay short-term borrowings, invest in real estate assets, and for other corporate purposes. Our equity interest, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares, decreased from 49% to approximately 35% as a result of the Offering. See “Investment in Shurgard Europe” below for more information.

As of March 31, 2019, we expect capital resources over the next year of approximately $1.4 billion, which exceeds our current ly identified capital needs of approximately $ 415 . 0 million. Our expected capital resources include: (i) $ 218.0 million of cash as of March 31, 2019, (ii) $484.1 million of available borrowing capacity on our revolving line of credit, (iii) $49 6 . 9 million in net proceeds from the public issuance of senior unsecured notes on April 12, 2019, and (iv) approximately $200 million to $250 million of expected retained operating c ash flow in the next year . Retained operating cash flow represents our expected cash flow provided by operating activities, less shareholder distributions and capital expenditures to maintain our real estate facilities.

Our currently identified capital needs consist primarily of $116.4 million in property acquisit ions currently under contract and $298.6 million of remaining spending on our current development pipeline, which will be inc urred primarily in the next 18 months . We have no substantial principal payments on debt until 2022. Our capital needs may increase over the next year as we expect to add projects to our development pipeline and acquire additional properties. In addition to other investment activities, we may also redeem outstanding preferred securities or repurchase shares of our common stock in the future.

See Liquidity and Capital Resources for further information regarding our capital requirements and anticipated sources of capital to fund such requirements.

Results of Operations

Operating Results for the Three Months Ended March 31, 2019

For the three months ended March 31, 2019, net income allocable to our common shareholders was $301.7 million or $1.73 per diluted common share, compared to $287.8 million or $1.65 per diluted common share in 2018 representing an increase of $13.9 million or $0.08 per diluted common share. The increase is due primarily to (i) a $7.4 million increase in self-storage net operating income (described below), (ii) a $19.6 million increase due to the impact of foreign currency exchange gains and losses associated with our Euro denominated debt and (iii) a reduction in general and administrative expense attributable primarily to $7 .8 million in incremental share- based compensation expense in the three months ended March 31, 2018 for the planned retirement of our former CEO and CFO. These increases were offset partially by ( a ) our $10.9 million equity share of gains on sale of real estate recorded by PS Business Parks , Inc. in 2018 and ( b ) an $8.5 million allocation to our preferred shareholders associated with our preferred share redemption activities.

The $7.4 million increase in self-storage net operating income is a result of a $2.3 million increase in our Same Store Facilities (as defined below) and a $5.1 million increase in our Non Same Store Facilities (as defined below). Revenues for the Same Store Facilities increased 1.5% or $8.7 million in the three months ended March 31, 2019 as compared to 2018, due primarily to higher realized annual rent per occupied square foot. Cost of operations for the Same Store Facilities increased by 3.9% or $6.3 million in the three months ended March 31, 2019 as compared to 2018, due primarily to increased property taxes and higher marketing expenses. The increase in net operating income of $5.1 million for the Non Same Store Facilities is due primarily to the impact of facilities acquired in 2018 and 2019, and the fill up of recently developed and expanded facilities.

Funds from Operations and Core Funds from Operations

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO represents GAAP net income before depreciation and amortization, which is excluded

because it is based upon historical costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. FFO also excludes gains or losses on sale of real estate assets and real estate impairment charges, which are also based upon historical costs and are impacted by historical depreciation. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.

For the three months ended March 31, 2019 , FFO was $2. 52 per diluted co mmon share, as compared to $2.37 per diluted common share for the same period in 201 8 , representing an increase 6.3%, or $0.15 per diluted common share.

The following tables reconcile diluted earnings per share to FFO per share and set forth the computation of FFO per share:


		Three Months Ended
		March 31,
		2019		2018
	(Amounts in thousands, except per share data)
Reconciliation of Diluted Earnings per Share to
FFO per Share:

Diluted Earnings per Share		$	1.73	$	1.65
Eliminate amounts per share excluded from FFO:
Depreciation and amortization			0.79		0.78
Gains on sale of real estate investments,
including our equity share from
investments			-		(0.06)
FFO per share		$	2.52	$	2.37

Computation of FFO per Share:

Net income allocable to common shareholders		$	301,743	$	287,819
Eliminate items excluded from FFO:
Depreciation and amortization			121,941		117,979
Depreciation from unconsolidated
real estate investments			17,514		19,315
Depreciation allocated to noncontrolling
interests and restricted share unitholders			(1,198)		(918)
Gains on sale of real estate investments,
including our equity share from
investments			-		(11,891)
FFO allocable to common shares		$	440,000	$	412,304
Diluted weighted average common shares			174,376		174,148
FFO per share		$	2.52	$	2.37

We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the impact of (i) foreign currency exchange gains and losses, (ii) EITF D-42 charges related to the redemption of preferred securities, (iii) acceleration of accruals due to the retirement of our former CEO and CFO, and (iv) certain other non-cash and/or nonrecurring income or expense items. We review Core FFO per share to evaluate our ongoing operating performance and we believe it is used by investors and REIT analysts in a similar manner. However, Core FFO per share is not a substitute for net income per share. Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.


Self-Storage Operations
Summary	Three Months Ended March 31,
					Percentage
	2019		2018		Change
	(Dollar amounts and square footage in thousands)
Revenues:
Same Store facilities	$	588,747	$	580,057	1.5%
Acquired facilities		11,208		6,927	61.8%
Newly developed and expanded facilities		34,390		28,267	21.7%
Other non-same store facilities		16,063		16,286	(1.4)%
		650,408		631,537	3.0%
Cost of operations:
Same Store facilities		169,187		162,845	3.9%
Acquired facilities		4,611		2,529	82.3%
Newly developed and expanded facilities		14,598		11,041	32.2%
Other non-same store facilities		5,260		5,772	(8.9)%
		193,656		182,187	6.3%
Net operating income (a):
Same Store facilities		419,560		417,212	0.6%
Acquired facilities		6,597		4,398	50.0%
Newly developed and expanded facilities		19,792		17,226	14.9%
Other non-same store facilities		10,803		10,514	2.7%
Total net operating income		456,752		449,350	1.6%

Depreciation and amortization expense:
Same Store facilities		(95,824)		(95,165)	0.7%
Acquired facilities		(6,723)		(5,859)	14.7%
Newly developed and expanded facilities		(12,217)		(8,987)	35.9%
Other non-same store facilities		(7,177)		(7,968)	(9.9)%
Total depreciation and
amortization expense		(121,941)		(117,979)	3.4%

Net income:
Same Store facilities		323,736		322,047	0.5%
Acquired facilities		(126)		(1,461)	(91.4)%
Newly developed and expanded facilities		7,575		8,239	(8.1)%
Other non-same store facilities		3,626		2,546	42.4%
Total net income	$	334,811	$	331,371	1.0%

Number of facilities at period end:
Same Store facilities		2,165		2,165	-
Acquired facilities		71		36	97.2%
Newly developed and expanded facilities		136		118	15.3%
Other non-same store facilities		72		74	(2.7)%
		2,444		2,393	2.1%
Net rentable square footage at period end:
Same Store facilities		139,801		139,801	-
Acquired facilities		4,511		2,295	96.6%
Newly developed and expanded facilities		14,672		10,655	37.7%
Other non-same store facilities		5,373		5,414	(0.8)%
		164,357		158,165	3.9%

(a)

Net operating income or “NOI” is a non-GAAP financial measure that excludes the impact of depreciation and amortization expense, which is based upon historical real estate costs and assumes that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. We utilize NOI in determining current property values, evaluating property performance, and in evaluating property operating trends. We believe that investors and analysts utilize NOI in a similar manner. NOI is not a substitute for net income, operating cash flow, or other related GAAP financial measures, in evaluating our operating results. See Note 11 to our March 31, 2019 financial statements for a reconciliation of NOI to our total net income for all periods presented.

Net operating income from our self-storage operations has increased 1.6% in the three months ended March 31, 2019 , as compared to the same period in 201 8 . These increases are due to increased revenues in our Same Store Facilities, as well as the acquisition and development of new facilities and the fill-up of unstabilized facilities.

Same Store Facilities

The Same Store Facilities represent those facilities that have been owned and operated at a stabilized level of occupancy, revenues and cost of operations since January 1, 201 7 . We review the operations of our Same Store Facilities, which excludes facilities whose operating trends are significantly affected by factors such as casualty events, as well as recently developed or acquired facilities, to more effectively evaluate the ongoing performance of our self-storage portfolio in 201 7 , 201 8 , and 201 9 . We believe the Same Store information is used by investors and REIT analysts in a similar manner. The Same Store pool in creased from 2,04 6 facilities at December 31 , 2018 to 2,165 at March 31, 2019 . The following table summarizes the historical operating results of these 2, 165 facilities (139 . 8 million net rentable square feet) that represent approximately 8 5 % of the aggregate net rentable square feet of ou r consolidated self-storage portfolio at March 31, 2019 .


Selected Operating Data for the Same Store Facilities (2,165 facilities)
	Three Months Ended March 31,
					Percentage
		2019	2018		Change

	(Dollar amounts in thousands, except for per square foot amounts)
Revenues:
Rental income	$	562,630	$	554,116	1.5%
Late charges and
administrative fees		26,117		25,941	0.7%
Total revenues (a)		588,747		580,057	1.5%

Cost of operations:
Property taxes		65,353		62,226	5.0%
On-site property manager
payroll		30,263		30,296	(0.1)%
Supervisory payroll		9,780		10,132	(3.5)%
Repairs and maintenance		13,414		12,181	10.1%
Utilities		11,028		11,480	(3.9)%
Marketing		8,780		6,879	27.6%
Other direct property costs		16,439		15,836	3.8%
Allocated overhead		14,130		13,815	2.3%
Total cost of operations (a)		169,187		162,845	3.9%
Net operating income		419,560		417,212	0.6%
Depreciation and
amortization expense		(95,824)		(95,165)	0.7%
Net income	$	323,736	$	322,047	0.5%

Gross margin (before depreciation
and amortization expense)		71.3%		71.9%	(0.8)%

Weighted average for the period:
Square foot occupancy		92.5%		92.1%	0.4%

Realized annual rental income per (b):
Occupied square foot	$	17.41	$	17.21	1.2%
Available square foot	$	16.10	$	15.86	1.5%

At March 31:
Square foot occupancy		92.1%		92.0%	0.1%
Annual contract rent per
occupied square foot (c)	$	17.94	$	17.71	1.3%

(a)

Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.

(b)

Realized annual rent per occupied square foot is computed by dividing rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period. Realized annual rent per available square foot (“REVPAF”) is computed by dividing rental income, before late charges and administrative fees, by the total available net rentable square feet for the period. These measures exclude late charges and administrative fees in order to provide a better measure of our ongoing level of revenue. Late charges are dependent upon the level of delinquency and administrative fees are dependent upon the level of move-ins. In addition, the rates charged for late charges and administrative fees can vary independently from rental rates. These measures take into consideration promotional discounts, which reduce rental income.

(c)

Annual contract rent represents the agreed upon monthly rate that is paid by our tenants in place at the time of measurement. Contract rates are initially set in the lease agreement upon move-in and we adjust them from time to time with notice. Contract rent excludes other fees that are charged on a per-item basis, such as late charges and administrative fees, does not reflect the impact of promotional discounts, and does not reflect the impact of rents that are written off as uncollectible.

Analysis of Same Store Revenue

Revenues generated by our Same Store Facilities increased by 1.5% in the three months ended March 31, 2019 as compared to the same period in 2018, due primarily to a 1.2% increase in realized annual rent per occupied square foot.

Same Store revenue growth is lower than long-term historical averages due to softness in demand in substantially all of our major markets, which has led to a lack of pricing power with respect to new tenants. We attribute some of this softness to local economic conditions and, in some markets most notably Atlanta, Austin, Charlotte, Chicago, Dallas, Denver, Houston, New York and Portland, increased supply of newly constructed self-storage facilities.

Same Store weighted average square foot occupancy remained strong at 92.5% and 92.1% in the three months ended March 31, 2019 and 2018, respectively.

We believe that high occupancies help maximize our rental income. We seek to maintain a weighted average square foot occupancy level of at least 90%, by regularly adjusting the rental rates and promotions offered to attract new tenants as well as adjusting our marketing efforts on the Internet and other channels in order to generate sufficient move-in volume to replace tenants that vacate.

Annual contract rent per foot for customers moving in was $13.59 and $13.73 for the three months ended March 31, 2019 and 2018, respectively, and the related square footage for the space they moved into was 24.3 million and 24.9 million, respectively. Annual contract rent per foot for customers moving out was $16.03 and $16.00 for the three months ended March 31, 2019 and 2018, respectively, and the related square footage for the space they moved out of was 23.1 million and 23.7 million, respectively.

In order to stimulate move-in volume, we often give promotional discounts, generally in the form of a “$1.00 rent for the first month” offer. Promotional discounts, based upon the move-in contractual rates for the related promotional period, totaled $20.0 million and $20.8 million for the three months ended March 31, 2019 and 2018, respectively. The decline in promotional discounts is due primarily to a lower volume of move-ins combined with lower average move-in rates.

Demand is higher in the summer months than in the winter months and, as a result, rental rates charged to new tenants are typically higher in the summer months than in the winter months. Demand fluctuates due to various local and regional factors, including the overall economy. Demand into our system is also impacted by new supply of self-storage space as well as alternatives to self-storage.

Increasing rental rates to existing tenants, generally on an annual basis, is a key component of our revenue growth. We determine the level of rental increases based upon our expectations regarding the impact of existing tenant rate increases on incremental move-outs. An important determinant of the level of rent increases is the number of long-term tenants that we have (generally, those that have been with us for at least a year).

We believe that customer trends throughout 2018 and the first three months of 2019 resulted in fewer move-outs and an increased average length of stay. The increased average length of stay contributed to an increased beneficial effect of rent increases to existing tenants, due to more long-term customers that were eligible for rate increases. The extent to which these positive trends will continue in 2019 is uncertain at this time.

We believe rental revenue growth in the remainder of 2019 will come primarily from continued annual rent increases to existing tenants. Our future rental growth will also be dependent upon many factors for each market that we operate in, including demand for self-storage space, the level of new supply of self-storage space and the average length of stay of our tenants.

We believe that the current trends in move-in, move-out, in place contractual rents and occupancy levels are consistent with continued moderate revenue growth in the remainder of 2019. However, there can be no assurance of continued revenue growth, because current trends, when viewed in the short-run, are volatile and not necessarily predictive of our revenues going forward because they are subject to many factors which cannot be predicted, such as the level of consumer demand and competition from newly developed and existing facilities. We are taking a number of actions to improve demand into our system, including increasing marketing spend on the Internet.

Analysis of Same Store Cost of Operations

Cost of operations (excluding depreciation and amortization) increased 3.9% in the three months ended March 31, 2019 as compared to the same period in 2018, due primarily to increased property tax and marketing expense.

Property tax expense increased 5.0% in the three months ended March 31, 2019 as compared to the same period in 2018. We expect property tax expense growth of approximately 5.0% in the remainder of 2019 due primarily to higher assessed values and, to a lesser extent, increased tax rates.

On-site property manager payroll expense was stable in the first three months of 2019 as compared to the same period in 2018, with higher wage rates offset partially by lower benefit expenses for the period. We expect on-site property manager payroll expense to increase on an inflationary basis in the remainder of 2019. We have been impacted by a tight labor market across the country, as well as increases in minimum wages in certain jurisdictions, and expect additional impacts in the remainder of 2019 as existing minimum wage increases become effective and new increases are enacted.

Supervisory payroll expense, which represents compensation paid to the management personnel who directly and indirectly supervise the on-site property managers, decreased 3.5% in the three months ended March 31, 2019 as compared to the same period in 2018, due primarily to a reduction in headcount. We expect inflationary increases in wage rates and increased headcount in the remainder of 2019.

Repairs and maintenance expense increased 10.1% in the three months ended March 31, 2019 as compared to the same period in 2018. Repair and maintenance costs include snow removal expense totaling $2.8 million and $2.2 million in the three months ended March 31, 2019 and 2018, respectively. Excluding snow removal costs, repairs and maintenance increased 6.5% in the three months ended March 31, 2019 as compared to the same period in 2018.

Repairs and maintenance expense levels are dependent upon many factors such as weather conditions, which can impact repair and maintenance needs including snow removal, inflation in material and labor costs, and random events. Accordingly, it is difficult to estimate future repairs and maintenance expense.

Our utility expenses are comprised primarily of electricity costs, which are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utility expense decreased 3.9% in the three months ended March 31, 2019 as compared to the same period in 2018, due primarily to reduced usage attributable to unseasonably cold weather conditions in the three months ended March 31, 2018. It is difficult to estimate future utility costs, because weather, temperature, and energy prices are volatile and not predictable.

Marketing expense is comprised principally of Internet advertising, television advertising and the operating costs of our telephone reservation center. Marketing expense varies based upon demand, occupancy levels, and other factors. Television and Internet advertising, in particular, can increase or decrease significantly in the short-term. Marketing expense increased 27.6% in the three months ended March 31, 2019 as compared to the same period in 2018. We expect continued increases in marketing expense in 2019 as we seek to improve customer demand for our space, and as cost per click for keyword search terms increases due to more aggressive keyword bidding competition from owners of newly developed facilities, nontraditional storage providers, as well as existing self-storage owners and operators.

Other direct property costs include administrative expenses incurred at the self-storage facilities, such as property insurance, telephone and data communication lines, business license costs, bank charges related to processing the facilities’ cash receipts, credit card fees, and the cost of operating each property’s rental office. These costs increased 3.8% in the three months ended March 31, 2019 as compared to the same period in 2018, due to higher credit card fees. We expect inflationary increases in other direct property costs in the remainder of 2019.

Allocated overhead represents administrative expenses for shared general corporate functions, which are allocated to self-storage property operations to the extent their efforts are devoted to self-storage operations. Such functions include information technology, human resources, operational accounting and finance, marketing, and costs of senior executives (other than our Chief Executive Officer and Chief Financial Officer, which are included in general and administrative expense). Allocated overhead increased 2.3% in the three months ended March 31, 2019 as compared to the same period in 2018. We expect approximately flat allocated overhead in the remainder of 2019.

Analysis of Same Store Depreciation and Amortization

Depreciation and amortization for Same Store Facilities increased 0.7% in the three months ended March 31, 2019 as compared to the same period in 2018. We expect modest increases in depreciation expense in the remainder of 2019.

The following table summarizes selected quarterly financial data with respect to the Same Store Facilities:


	For the Quarter Ended
	March 31		June 30		September 30		December 31		Entire Year

	(Amounts in thousands, except for per square foot amounts)
Total revenues:
2019	$	588,747
2018	$	580,057	$	590,585	$	607,598	$	594,302	$	2,372,542

Total cost of operations:
2019	$	169,187
2018	$	162,845	$	159,631	$	161,324	$	130,477	$	614,277

Property taxes:
2019	$	65,353
2018	$	62,226	$	62,940	$	62,750	$	36,550	$	224,466

Repairs and maintenance:
2019	$	13,414
2018	$	12,181	$	12,139	$	11,903	$	12,475	$	48,698

Marketing:
2019	$	8,780
2018	$	6,879	$	8,115	$	8,246	$	9,205	$	32,445

REVPAF:
2019	$	16.10
2018	$	15.86	$	16.19	$	16.62	$	16.25	$	16.23

Weighted average realized annual rent per occupied square foot:
2019	$	17.41
2018	$	17.21	$	17.25	$	17.72	$	17.57	$	17.44

Weighted average occupancy levels for the period:
2019		92.5%
2018		92.1%		93.8%		93.8%		92.5%		93.1%

Analysis of Market Trends

The following table sets forth selected market trends in our Same Store Facilities:


Same Store Facilities Operating Trends by Market
	Three Months Ended March 31,
		2019	2018		Change
	(Amounts in thousands, except for
Market (number of facilities,	per square foot amounts)
square footage in millions)
Revenues:
Los Angeles (204, 14.1)	$	88,623	$	86,143	2.9%
San Francisco (127, 7.9)		49,562		48,682	1.8%
New York (87, 6.0)		37,700		36,780	2.5%
Seattle-Tacoma (85, 5.8)		27,466		27,139	1.2%
Washington DC (88, 5.4)		27,513		26,857	2.4%
Miami (81, 5.7)		27,929		28,278	(1.2)%
Atlanta (99, 6.5)		21,564		20,894	3.2%
Dallas-Ft. Worth (98, 6.2)		20,334		20,718	(1.9)%
Chicago (129, 8.1)		28,901		28,990	(0.3)%
Houston (78, 5.3)		17,229		17,877	(3.6)%
Orlando-Daytona (69, 4.3)		14,865		14,624	1.6%
Philadelphia (56, 3.5)		14,304		13,653	4.8%
West Palm Beach (37, 2.4)		10,814		10,752	0.6%
Tampa (50, 3.3)		11,384		11,431	(0.4)%
Portland (43, 2.3)		10,122		10,216	(0.9)%
All other markets (834, 53.0)		180,437		177,023	1.9%
Total revenues	$	588,747	$	580,057	1.5%

Net operating income:
Los Angeles	$	72,366	$	70,618	2.5%
San Francisco		39,656		39,108	1.4%
New York		25,141		24,336	3.3%
Seattle-Tacoma		20,926		20,806	0.6%
Washington DC		19,782		19,437	1.8%
Miami		19,767		20,008	(1.2)%
Atlanta		15,774		15,306	3.1%
Dallas-Ft. Worth		13,276		13,920	(4.6)%
Chicago		13,215		14,158	(6.7)%
Houston		10,927		11,795	(7.4)%
Orlando-Daytona		10,522		10,423	0.9%
Philadelphia		9,999		9,427	6.1%
West Palm Beach		7,886		7,807	1.0%
Tampa		7,809		8,013	(2.5)%
Portland		7,512		7,785	(3.5)%
All other markets		125,002		124,265	0.6%
Total net operating income	$	419,560	$	417,212	0.6%


Same Store Facilities Operating Trends by Market (Continued)

		Three Months Ended March 31,
		2019	2018		Change
Weighted average square foot
occupancy:
Los Angeles		94.9%		94.8%	0.1%
San Francisco		93.8%		94.1%	(0.3)%
New York		93.3%		93.4%	(0.1)%
Seattle-Tacoma		91.7%		92.0%	(0.3)%
Washington DC		91.9%		90.3%	1.8%
Miami		92.1%		92.5%	(0.4)%
Atlanta		92.6%		91.9%	0.8%
Dallas-Ft. Worth		90.9%		90.6%	0.3%
Chicago		89.5%		88.1%	1.6%
Houston		88.5%		91.8%	(3.6)%
Orlando-Daytona		93.7%		94.3%	(0.6)%
Philadelphia		94.6%		93.5%	1.2%
West Palm Beach		93.1%		93.4%	(0.3)%
Tampa		91.8%		92.6%	(0.9)%
Portland		93.4%		93.6%	(0.2)%
All other markets		92.5%		91.6%	1.0%
Total weighted average
square foot occupancy		92.5%		92.1%	0.4%

Realized annual rent per
occupied square foot:
Los Angeles	$	25.64	$	24.89	3.0%
San Francisco		26.20		25.59	2.4%
New York		25.79		25.18	2.4%
Seattle-Tacoma		20.03		19.75	1.4%
Washington DC		21.15		21.12	0.1%
Miami		20.30		20.45	(0.7)%
Atlanta		13.36		13.04	2.5%
Dallas-Ft. Worth		13.62		13.94	(2.3)%
Chicago		15.18		15.48	(1.9)%
Houston		13.90		13.92	(0.1)%
Orlando-Daytona		13.88		13.59	2.1%
Philadelphia		16.19		15.63	3.6%
West Palm Beach		18.32		18.15	0.9%
Tampa		14.05		13.96	0.6%
Portland		18.36		18.51	(0.8)%
All other markets		13.99		13.86	0.9%
Total realized rent per
occupied square foot	$	17.41	$	17.21	1.2%


Same Store Facilities Operating Trends by Market (Continued)

		Three Months Ended March 31,
		2019	2018		Change
REVPAF:
Los Angeles	$	24.33	$	23.61	3.0%
San Francisco		24.57		24.09	2.0%
New York		24.06		23.51	2.3%
Seattle-Tacoma		18.37		18.17	1.1%
Washington DC		19.43		19.06	1.9%
Miami		18.70		18.92	(1.2)%
Atlanta		12.38		11.98	3.3%
Dallas-Ft. Worth		12.38		12.63	(2.0)%
Chicago		13.59		13.65	(0.4)%
Houston		12.30		12.78	(3.8)%
Orlando-Daytona		13.01		12.81	1.6%
Philadelphia		15.32		14.61	4.9%
West Palm Beach		17.06		16.96	0.6%
Tampa		12.90		12.93	(0.2)%
Portland		17.15		17.33	(1.0)%
All other markets		12.94		12.69	2.0%
Total REVPAF	$	16.10	$	15.86	1.5%

We believe that our geographic diversification and scale provide some insulation from localized economic effects and add to the stability of our cash flows. It is difficult to predict localized trends in short-term self-storage demand and operating results. Over the long run, we believe that markets that experience population growth, high employment, and otherwise exhibit economic strength and consistency will outperform markets that do not exhibit these characteristics.

Acquired Facilities

The Acquired Facilities represent 71 facilities that we acquired in 2017, 2018, and the first three months of 2019. As a result of the stabilization process and timing of when these facilities were acquired, year-over-year changes can be significant.

The following table summarizes operating data with respect to the Acquired Facilities:


ACQUIRED FACILITIES (Continued)	As of March 31, 2019
Costs to acquire (in thousands):
2017 Acquisitions (c)	$	291,329
2018 Acquisitions		181,020
2019 Acquisitions		81,316
	$	553,665

(a)

Represents the percentage change with respect to square foot occupancy and annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.

(b)

Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.

(c)

Acquisition costs includes (i) $149.8 million paid for 22 facilities acquired from third parties, (ii) $135.5 million cash paid for the remaining 74.25% interest we did not own in 12 stabilized properties owned by a legacy institutional partnership and (iii) the $6.3 million historical book value of our existing investment in the legacy institutional partnership.

We believe that our management and operating infrastructure allows us to generate higher net operating income from newly acquired facilities than was achieved by the previous owners. However, it can take 24 or more months for us to fully achieve the higher net operating income and the ultimate levels of net operating income to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that we will achieve our expectations with respect to these newly acquired facilities.

The facilities included above under “2017 acquisitions,” “2018 acquisitions,” and “2019 acquisitions” have an aggregate of approximately 4.5 million net rentable square feet, including 0.6 million in each of Virginia and Texas, 0.5 million in Minnesota, 0.3 million in each of Nebraska and Ohio, 0.2 million in each of Kentucky, Indiana, South Carolina, Georgia, California, New York and Florida, and 0.8 million in other states.

For the three months ended March 31, 2019, the weighted average annualized yield on cost, based upon net operating income, for (i) the 22 facilities acquired in 2017 from third parties was 5.7% , ( ii ) the 12 stabilized facilities owned by a legacy institutional partnership, with respect to the 74.25% interest we acquired was 5.8% and (iii) the 25 properties acquired in 2018 was 3.7%. The yield for the facilities acquired in 2019 is not meaningful due to our limited ownership period.

Subsequent to March 31, 2019, we acquired or were under contract to acquire ten self-storage facilities (four in Florida, two in Virginia and one each in Arizona, Colorado, Michigan and Texas) with 0.7 net rentable square feet for $116.4 million .

Analysis of Depreciation and Amortization of Acquired Facilities

Depreciation and amortization with respect to the Acquired Facilities for the three months ended March 31, 2019 and 2018 totaled $6.7 million and $5.9 million, respectively. These amounts include (i) depreciation of the acquired buildings, which is recorded generally on a straight line basis, and (ii) amortization of cost allocated to the tenants in place upon acquisition of a facility, which is recorded based upon the benefit of such existing tenants to each period and thus is highest when the facility is first acquired and declines as such tenants vacate. With respect to the Acquired Facilities owned at March 31, 2019, depreciation of buildings and amortization of tenant intangibles is expected to aggregate approximately $29.0 million in the year ending December 31, 2019. There will be additional depreciation with respect to new buildings that are acquired in the remainder of 2019.

Developed and Expanded Facilities

The developed and expanded facilities include 74 facilities that were developed on new sites since January 1, 2013, and 62 facilities subject to expansion of their net rentable square footage. Of these expansions, 28 are completed at March 31, 2019 and 34 are currently in process or are expected to commence renovation in 2019.

The following table summarizes operating data with respect to the Developed and Expanded Facilities:


DEVELOPED AND EXPANDED	Three Months Ended March 31,
FACILITIES	2019		2018		Change (a)
	($ amounts in thousands, except for per square foot amounts)
Revenues (b):
Developed in 2013 - 2015	$	6,798	$	6,401	$	397
Developed in 2016 and 2017		9,877		7,087		2,790
Developed in 2018 and 2019		2,395		33		2,362
Completed Expansions		6,981		5,712		1,269
Expansions in process		8,339		9,034		(695)
Total revenues		34,390		28,267		6,123

Cost of operations (b):
Developed in 2013 - 2015		2,035		2,099		(64)
Developed in 2016 and 2017		4,638		3,820		818
Developed in 2018 and 2019		2,338		235		2,103
Completed Expansions		2,835		2,176		659
Expansions in process		2,752		2,711		41
Total cost of operations		14,598		11,041		3,557

Net operating income:
Developed in 2013 - 2015		4,763		4,302		461
Developed in 2016 and 2017		5,239		3,267		1,972
Developed in 2018 and 2019		57		(202)		259
Completed Expansions		4,146		3,536		610
Expansions in process		5,587		6,323		(736)
Net operating income		19,792		17,226		2,566
Depreciation and
amortization expense		(12,217)		(8,987)		(3,230)
Net income	$	7,575	$	8,239	$	(664)

At March 31:
Square foot occupancy:
Developed in 2013 - 2015		91.4%		90.4%		1.1%
Developed in 2016 and 2017		76.5%		61.2%		25.0%
Developed in 2018 and 2019		42.0%		13.1%		220.6%
Completed Expansions		51.5%		75.2%		(31.5)%
Expansions in process		81.6%		89.4%		(8.7)%
		66.9%		72.8%		(8.1)%
Annual contract rent per occupied square foot:
Developed in 2013 - 2015	$	15.55	$	14.88		4.5%
Developed in 2016 and 2017		12.24		11.80		3.7%
Developed in 2018 and 2019		10.62		13.22		(19.7)%
Completed Expansions		14.82		16.59		(10.7)%
Expansions in process		16.75		17.15		(2.3)%
	$	14.03	$	14.75		(4.9)%


DEVELOPED AND EXPANDED	Three Months Ended March 31,
FACILITIES (Continued)	2019		2018		Change
	(Amounts in thousands, except for number of facilities)
Number of facilities:
Developed in 2013 - 2015		20		20		-
Developed in 2016 and 2017		32		32		-
Developed in 2018 and 2019		22		4		18
Completed Expansions		28		28		-
Expansions in process		34		34		-
		136		118		18

Net rentable square feet (c):
Developed in 2013 - 2015		1,877		1,877		-
Developed in 2016 and 2017		4,181		4,181		-
Developed in 2018 and 2019		2,513		451		2,062
Completed Expansions		3,756		1,856		1,900
Expansions in process		2,345		2,290		55
		14,672		10,655		4,017

	As of March 31, 2019
Costs to develop:
Developed in 2013 - 2015	$	188,049
Developed in 2016 and 2017		497,456
Developed in 2018 and 2019		314,734
Completed Expansions (d)		223,754
Expansions in process (e)		-
	$	1,223,993

(a)

Represents the percentage change with respect to square foot occupancy and annual contract rent per occupied square foot, and the absolute nominal change with respect to all other items.

(b)

Revenues and cost of operations do not include tenant reinsurance and merchandise sale revenues and expenses generated at the facilities. See “Ancillary Operations” below for more information.

(c)

The facilities included above have an aggregate of approximately 14.7 million net rentable square feet at March 31, 2019, including 6.4 million in Texas, 2.4 million in California, 1.6 million in Florida, 1.2 million in Colorado, 0.4 million each of Washington, Arizona, North Carolina and Minnesota, and 1.5 million in other states.

(d)

These amounts only include the direct cost incurred to expand and renovate these facilities, and do not include (i) the original cost to develop or acquire the facility or (ii) the lost revenue on space demolished during the construction and fill-up period.

(e)

We expect to add 2.7 million net rentable square feet to these facilities at an aggregate cost of approximately $318.1 million, not including (i) the original cost to develop or acquire the facility or (ii) the lost revenue on space demolished during the construction and fill-up period.

It typically takes at least three to four years for a newly developed or expanded self-storage facility to stabilize with respect to revenues. Even after achieving a high level of physical occupancy, which occurs as early as two to three years following completion of the development or expansion, there can still be a period of elevated revenue growth as the tenant base matures. Our earnings are diluted during the construction and stabilization period due to the cost of capital to fund the development cost, as well as the related construction and development overhead expenses in general and administrative expense. Despite this short-term dilution, we believe that our development and expansion activities generate favorable risk-adjusted returns over the long run.

Newly Developed Facilities

The facilities included under “Developed in 2013-2015” were opened in 2013, 2014, and 2015, and we believe they have reached stabilization at March 31, 2019. The annualized yield on cost, based upon the net operating income for the three months ended March 31, 2019, was 10.1%.

The facilities included under “Developed in 2016 and 2017” and “Developed in 2018 and 2019” are not stabilized with respect to occupancy or revenues at March 31, 2019, and we expect continued growth in these facilities throughout 2019 and beyond as they continue to stabilize. The annualized yields that may be achieved on these facilities upon stabilization will depend on many factors, including local and current market conditions in the vicinity of each property such as consumer demand and the level of new and existing supply. Accordingly, the yields on the facilities opened in 2013, 2014, and 2015 may not be indicative of these yield on cost to be achieved on these facilities.

We have eleven additional newly developed facilities in process, which will have a total of 1.2 million net rentable square feet of storage space and have an aggregate development cost totaling approximately $194.3 million. We expect these facilities to open over the next 18 months.

Expansions of Existing Facilities

The expansion of an existing facility involves the construction of new space on an existing facility, either on existing unused land or through the demolition of existing buildings in order to facilitate densification. The construction costs for an expanded facility may include, in addition to adding space, adding amenities such as climate control to existing space, improving the visual appeal of the facility, and to a much lesser extent, the replacement of existing doors, roofs, and HVAC.

The return profile on the expansion of existing facilities differs from a new facility, due to a lack of land cost, and there can be less cash flow risk because we have more direct knowledge of the local demand for space on the site as compared to a new facility. However, expansions involve the demolition of existing revenue-generating space with the loss of the related revenues for tenants that have moved our during the construction and fill-up period.

The facilities under “completed expansions” represent those facilities where the expansions have been completed at March 31, 2019. We incurred a total of $223.8 million in direct cost to expand these facilities, demolished a total of 0.8 million net rentable square feet of storage space, and built a total of 2.7 million net rentable square feet of new storage space.

The facilitie s under “expansions in process” represent those facilities where development is in process or that we expect to commence development in 2019. We have already demolished a total of 0.2 million net rentable square feet at March 31, 2019, we expect to demolish an additional 0.3 million net rentable square feet, and we expect to build a total of 2.7 million net rentable square feet of storage space for an aggregate di rect development cost of $318.1 million.

Analysis of Depreciation and Amortization of Developed and Expanded Facilities

Depreciation and amortization with respect to the Developed and Expanded Facilities for the three months ended March 31, 2019 and 2018 totaled $12.2 million and $9.0 million, respectively. These amounts represent depreciation of the developed buildings and, in the case of the expanded facilities, the legacy depreciation on the existing buildings. With respect to the Developed and Expanded Facilities completed at March 31, 2019, depreciation of buildings and amortization of tenant intangibles is expected to aggregate approximately $ 50.9 million in the year ending December 31, 2019. There will be additional depreciation of new buildings that are developed or expanded in the remainder of 2019.

Other non-same store facilities

The facilities under “Other non-same store facilities” represent facilities which, while not newly acquired, developed, or expanded, are not fully stabilized since January 1, 2017, due primarily to casualty events such as hurricanes, floods, and fires.

The Other non-same store facilities have an aggregate of 5.4 million net rentable square feet, including 1.1 million in Texas, 0.8 million in Oklahoma, 0.7 million in California, 0.6 million in each of Ohio and South Carolina, 0.5 million in Florida and 1.1 million other states.

The net operating income for these facilities increased from $10.5 million in the three months ended March 31, 2018 to $10.8 million in the three months ended March 31, 2019. During the three months ended March 31, 2019, the average occupancy for these facilities totaled 87.8% (86.4% for the same period in 2018), and the realized rent per occupied square feet totaled $13.01 ($13.34 for the same period in 2018).

Over the longer term, we expect the growth in operations of these facilities to be similar to that of our Same Store facilities. However, in the short run, year over year will vary due to the impact of the underlying events which resulted in these facilities being classified as non-same store.

Depreciation and amortization with respect to the Other non-same store facilities for the three months ended March 31, 2019 and 2018 totaled $7.2 million and $8.0 million, respectively. We expect depreciation for these facilities to approximate $28.8 million for the year ending December 31, 2019.

Ancillary Operations

Ancillary revenues and expenses include amounts associated with the reinsurance of policies against losses to goods stored by tenants in our self-storage facilities in the U.S. and the sale of merchandise at our self-storage facilities. The following table sets forth our ancillary operations:


	Three Months Ended March 31,
	2019		2018		Change
	(Amounts in thousands)
Revenues:
Tenant reinsurance premiums	$	31,593	$	30,837	$	756
Merchandise		7,037		7,550		(513)
Total revenues		38,630		38,387		243

Cost of Operations:
Tenant reinsurance		6,251		6,200		51
Merchandise		4,294		4,440		(146)
Total cost of operations		10,545		10,640		(95)

Net income
Tenant reinsurance		25,342		24,637		705
Merchandise		2,743		3,110		(367)

Total net income	$	28,085	$	27,747	$	338

Tenant reinsurance operations: Our customers have the option of purchasing insurance from a non-affiliated insurance company to cover certain losses to their goods stored at our facilities. A wholly-owned, consolidated subsidiary of Public Storage fully reinsures such policies, and thereby assumes all risk of losses under these policies from the insurance company. The subsidiary receives reinsurance premiums, substantially equal to the premiums collected from our tenants, from the non-affiliated insurance company. Such reinsurance premiums are shown as “Tenant reinsurance premiums” in the above table.

The subsidiary pays a fee to Public Storage to assist with the administration of the program and to allow the insurance to be marketed to our tenants. This fee represents a substantial amount of the reinsurance premiums received by our subsidiary. The fee is eliminated in consolidation and is therefore not shown in the above table.

Tenant reinsurance revenue increased from $30.8 million for the three months ended March 31, 2018 to $31.6 million in the three months ended March 31, 2019, due primarily to an increase in our tenant base with respect to acquired, newly developed, and expanded facilities.

Tenant insurance revenues include $27.2 million in each of the three month periods ended March 31, 2019 and 2018, for the Same Store Facilities.

We expect future growth will come primarily from customers of newly acquired and developed facilities, as well as additional tenants at our existing unstabilized self-storage facilities.

Cost of operations primarily includes claims paid that are not covered by our outside third-party insurers, as well as claims adjustment expenses. Claims expenses vary based upon the level of insured tenants, and the level of events affecting claims at particular properties (such as burglary) as well as catastrophic weather events affecting multiple properties such as hurricanes and floods . Cost of operations were $6.3 million and $6.2 million in the three months ended March 31, 2019 and 2018, respectively .

Merchandise sales: We sell locks, boxes, and packing supplies at our self-storage facilities and the level of sales of these items is primarily impacted by the level of move-ins and other customer traffic at our self-storage facilities. We do not expect any significant changes in revenues or profitability from our merchandise sales in the remainder of 2019.

Equity in earnings of unconsolidated real estate entities

At March 31, 2019, we have equity investments in PSB and Shurgard Europe, which we account for on the equity method and record our pro-rata share of the net income of these entities for each period. The following table, and the discussion below, sets forth the significant components of our equity in earnings of unconsolidated real estate entities:


	Three Months Ended March 31,
	2019		2018		Change
	(Amounts in thousands)
Equity in earnings:
PSB	$	13,720	$	23,831	$	(10,111)
Shurgard Europe		3,952		6,964		(3,012)
Total equity in earnings	$	17,672	$	30,795	$	(13,123)

Investment in PSB: At March 31, 2019 and December 31, 2018, we had approximately a 42% common equity interest in PS Business Parks, Inc. (“PSB”), comprised of our ownership of 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units in an operating partnership controlled by PSB. The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.

At March 31, 2019, PSB wholly-owned approximately 28. 3 million rentable square feet of commercial space and had a 95% interest in a 395-unit apartment complex . PSB also manages commercial space that we own pursuant to property management agreements.

Equity in earnings from PSB totaled $13.7 million and $23.8 million for the three months ended March 31, 2019 and 2018, respectively. Included in the amount for three months ended March 31, 2018 is our equity share of gains on sale of real estate totaling $10.9 million.

Equity in earnings from PSB, excluding the aforementioned real estate gains, increased $0.8 million in the three months ended March 31, 2019 as compared to 2018 due to improved property operations. See Note 4 to our

March 31, 2019 financial statements for further discussion regarding PSB. PSB’s filings and selected financial information that can be accessed through the SEC, and on PSB’s website, www.psbusinessparks.com . Information on this website is not incorporated by reference herein and is not a part of this Quarterly Report on Form 10-Q.

Investment in Shurgard Europe: At March 31, 2019 and December 31, 2018, we have an approximate 35% equity share in Shurgard Europe’s net income, comprised of a direct and indirect pro-rata ownership interest in 31.3 million shares.

On July 13, 2018, Shurgard Europe paid a cash distribution totaling $296.7 million, of which we received our 49% equity share totaling $145.4 million. On October 15, 2018, Shurgard Europe completed an initial global offering (the “Offering”), and its shares commenced trading on Euronext Brussels under the “SHUR” symbol. In the Offering, Shurgard Europe issued 25.0 million of its common shares to third parties at a price of €23 per share, for an aggregate of €575 million in gross proceeds. Our ownership interest was reduced from 49% to approximately 35% as a result of the Offering.

At March 31, 2019, Shurgar d Europe’s operations are comprised of 231 wholly-owned facilities with 13 mil lion net rentable square feet. As described in more detail in Note 4 to our March 31, 2019 financial statements, we receive trademark license fees from Shurgard Europe. Shurgard Europe’s public filings and publicly reported information can be obtained on its website, https://corporate.shurgard.eu and on the website of the Luxembourg Stock Exchange, http://www.bourse.lu . Information on these websites is not incorporated by reference herein and is not a part of this Quarterly Report on Form 10-Q.

Our equity in earnings from Shurgard Europe totaled $4.0 million and $7.0 million for the three months ended March 31, 2019 and 2018, respectively. The decrease in the three months ended March 31, 2019 as compared to the same period in 2018 is due primarily to the effect of uninvested equity Offering proceeds and a reduction in average exchange rates of the U.S. Dollar to the Euro from 1.229 to 1.136 in the three months ended March 31, 2018 and 2019, respectively. Prior to the impact of changes in exchange rates, property operations improved due to increased same store operations and the impact of newly acquired facilities.

In 2018, Shurgard Europe acquired eight self-storage facilities from third parties (five in Sweden and three in the United Kingdom) for an aggregate of $114.5 million. On October 18, 2018, Shurgard acquired our wholly-owned property in West London for $42.1 million in cash. In 2018, Shurgard Europe opened two newly developed facilities, one each in Sweden and Germany at an aggregate total cost of $19.6 million.

Unlike our operations in the U.S., Shurgard Europe operates through taxable corporations in each of the countries in which it does business and incurs tax expense.

We expect year-over-year reductions in ongoing equity earnings from Shurgard Europe in the remainder of 2019, assuming a portion of the proceeds of the Offering remain uninvested. Shurgard Europe also expects to begin distributing a substantial portion of its earnings to its shareholders, which will result in reduced cash available to reinvest in real estate. Our future earnings from Shurgard Europe will also be affected by (i) the operating results of its existing facilities, (ii) the level of development and acquisition activities, (iii) income tax rates, and (iv) the exchange rate between the U.S. Dollar and currencies in the countries in which Shurgard Europe conducts its business (principally the Euro).

Analysis of items not allocated to segments

General and administrative expense: The following table sets forth our general and administrative expense:


	Three Months Ended March 31,
	2019		2018		Change
	(Amounts in thousands)

Share-based compensation expense	$	7,594	$	16,910	$	(9,316)
Costs of senior executives		1,328		3,570		(2,242)
Development and acquisition costs		2,067		2,333		(266)
Tax compliance costs and taxes paid		1,433		1,348		85
Legal costs		3,704		1,744		1,960
Public company costs		1,512		1,219		293
Other costs		1,865		4,396		(2,531)
Total	$	19,503	$	31,520	$	(12,017)

Share-based compensation expense includes the amortization of restricted share units and stock options granted to employees and trustees, as well as related employer taxes. Share-based compensation expense varies based upon the level of grants and their related vesting and amortization periods, forfeitures, as well as the Company’s common share price on the date of grant.

In February 2018, we announced that Ron Havner, our CEO and John Reyes, our CFO at the time were retiring from their executive roles at the end of 2018 and would serve only as Trustees of the Company. Pursuant to our share-based compensation plans, their unvested grants will continue to vest over the original vesting periods during their service as Trustees. For financial reporting, the end of the service periods for previous stock option and RSU grants for these executives have changed from (i) the various vesting dates to (ii) December 31, 2018. Accordingly, all remaining share-based compensation expense for these two executives was amortized through the end of 2018. Included in the three months ended March 31, 2018 is approximately $7.8 million in incremental share-based compensation expense for the planned retirement of our former CEO and CFO. The remaining $1.5 million decrease in share-based compensation expense is due to a reduction in ongoing share-based compensation awards. S ee Note 10 to our March 31, 2019 financial statements for further information on our share-based compensation. We expect a reduction in share-based compensation expense in the remainder of 2019 as compared to 2018.

Costs of senior executives represent the cash compensation paid to our CEO and CFO.

Development and acquisition costs primarily represent internal and external expenses related to our development and acquisition of real estate facilities and varies primarily based upon the level of activities. The amounts in the above table are net of $3.1 million for each of the three month periods ended March 31, 2019 and 2018, in development costs that were capitalized to newly developed and redeveloped self-storage facilities. Development and acquisition costs are expected to remain stable in the remainder of 2019.

Tax compliance costs and taxes paid include taxes paid to various state and local authorities, the internal and external costs of filing tax returns, costs associated with complying with federal and state tax laws, and maintaining our compliance with Internal Revenue Service REIT rules. Such costs vary primarily based upon the tax rates of the various states in which we do business.

Legal costs include internal personnel as well as fees paid to legal firms and other third parties with respect to general corporate legal matters and risk management, and varies based upon the level of legal activity. The future level of legal costs is not determinable.

Public company costs represent the incremental costs of operating as a publicly-traded company, such as internal and external investor relations expenses, stock listing and transfer agent fees, board of trustees’ (our “Board”) costs, and costs associated with maintaining compliance with applicable laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and Sarbanes-Oxley Act of 2002.

Other costs represent certain professional and consulting fees, payroll, and overhead that are not attributable to our property operations. Such costs vary depending upon the level of corporate activities, initiatives, and other factors and, as such, are not predictable.

Our future general and administrative expenses are difficult to estimate, due to their dependence upon many factors, including those noted above.

Interest and other income: Interest and other income is comprised primarily of the net income from our commercial operations, our property management operation, interest earned on cash balances, and trademark license fees received from Shurgard Europe, as well as sundry other income items that are received from time to time in varying amounts. Amounts attributable to our commercial operations and property management operations totaled $2.7 million and $2.8 million in the three months ended March 31, 2019 and 2018, respectively. The increase in interest and other income is attributable to higher interest rates on uninvested cash balances. We do not expect any significant changes in interest and other income in 2019.

Interest expense: For the three month s ended March 31, 2019 and 2018, we incurred $9.3 million, and $9.5 million, respectively, of interest on our outstanding debt. In determining interest expense, these amounts were offset by capitalized interest of $1.2 million and $1.4 million during the three month s ended March 31, 2019 and 2018, respectively, associated with our development activities. At March 31, 2019 , we had $1.4 billion of debt outstanding, with an average interest rate of 2.6%. See Note 6 to our March 31, 2019 financial statements for further information on our debt balances.

On April 12, 2019, we completed a public offering of $500 million in aggregate principal amount of senior notes bearing interest at an annual rate of 3.385% maturing on May 1, 2029.

Future interest expense will be dependent upon the level of outstanding debt and the amount of in-process development costs.

Foreign Exchange Gain (Loss): For the three months ended March 31, 2019, we recorded a foreign currency translation gain of $7.8 million, representing the changes in the U.S. Dollar equivalent of our Euro-denominated unsecured notes due to fluctuations in exchange rates (loss of $11.8 million for the same period in 2018). The Euro was translated at exchange rates of approximately 1.122 U.S. Dollars per Euro at March 31, 2019, 1.144 at December 31, 2018, 1.232 at March 31, 2018 and 1.198 at December 31, 2017. Future gains and losses on foreign currency translation will be dependent upon changes in the relative value of the Euro to the U.S. Dollar, and the level of Euro-denominated debt outstanding.

Gain on Real Estate Investment Sales: In the three months ended March 31, 2018, we recorded gains totaling $424,000, primarily in connection with the partial sale of real estate facilities pursuant to eminent domain proceedings.

Net Income Allocable to Preferred Shareholders: Net income allocable to preferred shareholders based upon distributions increased from $54.1 million in the three months ended March 31, 201 8 to $55.0 million in the same period in 2019, due to higher average preferred shares outstanding. We also allocated $8.5 million of income from our common shareholders to the holders of our preferred shares in the three months ended March 31, 2019 in connection with the redemption of our Series Y Preferred Shares. Based upon our preferred shares outstanding at March 31, 2019, our quarterly distribution to our preferred shareholders is expected to be approximately $53.5 million.

Liquidity and Capital Resources

Financing Strategy: As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments. As a result, in order to grow our asset base, access to capital is important. Historically we have primarily financed our cash investment activities with retained operating cash flow combined with the proceeds from the issuance of preferred securities. Over the past three years, we have diversified our capital sources by issuing medium term debt.

Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are one of the highest rated REITs, as rated by major rating agencies Moody’s and Standard & Poor’s. Our unsecured debt has an “A” credit rating by Standard & Poor’s and “A2” by Moody’s. Our credit ratings on each of our series of preferred shares are “A3” by Moody’s and “BBB+” by Standard & Poor’s. Our credit profile and ratings enables us to effectively access both the public and private capital markets to raise capital.

We have a $500.0 million revolving line of credit which we occasionally use as temporary “bridge” financing until we are able to raise longer term capital. As of March 31, 2019 and May 1, 2019, there were no borrowings outstanding on the revolving line of credit, however, we do have approximately $15.9 million of outstanding letters of credit which limits our borrowing capacity to $484.1 million.

On April 19, 2019, we amended our revolving line of credit to (i) extend the maturity date from March 31, 2020 to April 19 , 2024, ( ii) decrease the current effective borrowing spread over LIBOR from 0.850% to 0.70%, and (iii) decrease the current effective facility fee from 0.080% to 0.070%. All other terms remain substantially the same.

Over the long-term, we expect to fund our capital requirements with retained operating cash flow, the issuance of additional medium or long-term debt, and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the desire for leverage, refinancing risk, and considering potential constraints caused by certain features of capital sources, such as debt covenants.

Liquidity and Capital Resource Analysis: We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for principal payments on debt, maintenance capital expenditures and distributions to our shareholders for the foreseeable future.

To the extent our retained operating cash flow, cash on hand, and line of credit are insufficient to fund our activities, we believe we have a variety of possibilities to raise additional capital including issuing common or preferred securities, issuing debt, or entering into joint venture arrangements to acquire or develop facilities.

Required Debt Repayments: As of March 31, 2019, our outstanding debt totaled approximately $1.4 billion, consisting of $28.7 million of secured debt, $383.7 million of Euro-denominated unsecured debt and $1.0 billion of U.S. Dollar denominated unsecured debt. Approximate principal maturities are as follows (amounts in thousands):



Remainder of 2019	$	1,448
2020		2,015
2021		1,890
2022		502,584
2023		19,226
Thereafter		885,274
	$	1,412,437

The remaining maturities on our debt over at least the next three years are nominal compared to our expected annual retained operating cash flow.

Capital Expenditure Requirements: Capital expenditures include general maintenance, major repairs or replacements to elements of our facilities to keep our facilities in good operating condition and maintain their visual appeal. Capital expenditures do not include costs relating to the development of new facilities or redevelopment of existing facilities to increase their available rentable square footage.

Capital expenditures totaled $30.2 million in the first three months of 2019, and are expected to approximate $200 million in the year ending December 31, 2019. Our capital expenditures for 2019 include certain projects that are upgrades and not traditional like-for-like replacements of existing components, and in certain circumstances replace existing components before the end of their functional lives. Such projects include installation of LED lighting, replacing existing planting configurations with more drought tolerant and low maintenance configurations, installation of solar panels, improvements to office configurations to provide a more customer-friendly experience, and improvements to outdoor facades and color schemes. Such incremental investments improve customer satisfaction, the attractiveness and competitiveness of our facilities to new and existing customers, or reduce operating costs. The amount and extent to which these expenditures will continue after 2019 is uncertain at this time.

Requirement to Pay Distributions: For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and gains from real property, dividends, and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.

On April 24 , 201 9 , our Board declared a regular common quarterly dividend of $2.00 per common share totaling approximately $348 million, which will be paid at the end of June 2019. Our consistent, long-term dividend policy has been to distribute only our taxable income. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements after taking into consideration distributions to the preferred shareholders and will be funded with cash flows from operating activities.

We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at March 31, 2019, to be approximately $214.1 million per year.

We estimate we will pay approximately $7.0 million per year in distributions to noncontrolling interests outstanding at March 31, 2019.

Real Estate Investment Activities: Subsequent to March 31, 2019, we acquired or were under contract to acquire (subject to customary closing conditions) ten self-storage facilities for $116.4 million. We will continue to seek to acquire properties; however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.

As of March 31, 2019 we had development and expansion projects at a total cost of approximately $512.4 million. Costs incurred through March 31, 2019 were $213.8 million, with the remaining cost to complete of

$298.6 million expected to be incurred primarily in the next 18 months. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional projects; however, the level of future development and redevelopment may be limited due to various constraints such as difficulty in finding projects that meet our risk-adjusted yield expectations and challenges in obtaining building permits for self-storage activities in certain municipalities.

Redemption of Preferred Securities : Historically, we have taken advantage of refinancing higher coupon preferred securities with lower coupon preferred securities. In the future, we may also elect to finance the redemption of preferred securities with proceeds from the issuance of debt. As of May 1, 2019, we have the following additional series of preferred securities that are eligible for redemption, at our option and with 30 days’ notice; our 5.625% Series U Preferred Shares ($288 million), our 5.375% Series V Preferred Shares ($495 million), our 5.200% Series W Preferred Shares ($500 million), and our 5.200% Series X Preferred Shares ($225 million). Our 6.000% Series Z Preferred Shares ($288 million) become callable on June 4, 2019. Redemption of such preferred shares will depend upon many factors, including the rate at which we could issue replacement preferred securities. None of our preferred securities are redeemable at the option of the holders.

Repurchases of Common Shares : Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. During the three months ended March 31, 2019, we did not repurchase any of our common shares. From the inception of the repurchase program through May 1, 2019, we have repurchased a total of 23,721,916 common shares at an aggregate cost of approximately $679.1 million. Future levels of common share repurchases will be dependent upon our available capital, investment alternatives and the trading price of our common shares.

Contractual Obligations

Our significant contractual obligations at March 31, 2019 and their impact on our cash flows and liquidity are summarized below for the years ending December 31 (amounts in thousands):


				Remainder
				of
		Total		2019		2020		2021		2022		2023		Thereafter


Interest and principal payments
on debt (1)	$	1,635,199	$	28,624	$	38,161	$	37,934	$	535,078	$	42,807	$	952,595

Leases and other commitments (2)		70,975		3,223		4,268		4,314		3,693		3,461		52,016

Construction commitments (3)		99,098		81,978		17,120		-		-		-		-

Total	$	1,805,272	$	113,825	$	59,549	$	42,248	$	538,771	$	46,268	$	1,004,611

(1)

Represents contractual principal and interest payments. Amounts with respect to certain Euro-denominated debt are based upon exchange rates at March 31, 2019. See Note 6 to our March 31, 2019 financial statements for further information.

(2) Represents future contractual payments on land, equipment and office space under various leases and other commitments.

(3) Represents future expected payments for construction under contract at March 31, 2019.

We estimate the annual distribution requirements with respect to our Preferred Shares outstanding at March 31, 2019 to be approximately $ 214.1 million per year. Dividends are paid when and if declared by our Board and accumulate if not paid.

Off-Balance Sheet Arrangements : At March 31, 2019, we had no material off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) and the instructions thereto.

I TEM 3. Quantitative and Qualitative Disclosures about Market Risk

To limit our exposure to market risk, we are capitalized primarily with preferred and common equity. Our preferred shares are redeemable at our option generally five years after issuance, but the holder has no redemption o ption. Our debt is our only market-risk sensitive portion of our capital structure, which totals approximately $1.4 billion and represents 15 . 5 % of the book value of our equity at March 31, 2019 .

We have foreign currency exposure at March 31, 2019 related to ( i) our investment in Shurgard Europe, with a book value of $351 .2 million and ( ii) €342.0 million ($ 383.7 million) of Euro -denominated unsecured notes payable.

The fair value of our fixed rate debt at March 31, 2019 is approximately $1.4 billion. The table below summarizes the annual maturities of our fixed rate debt, which had a weighted average effective rate of 2.6% at March 31, 2019 . See Note 6 to our March 31, 2019 financial statements for further information regarding our fixed rate debt (amounts in thousands ).


	Remainder of
	2019			2020		2021		2022		2023		Thereafter		Total

Fixed rate debt	$	1,448	$	2,015	$	1,890	$	502,584	$	19,226	$	885,274	$	1,412,437

ITEM 4 . Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclos ure based on the definition of “ dis closure controls and procedures” in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance. We also have investments in certain unconsolidated real estate entities and because we do not control these entities, our disclosure controls and procedures with respect to such entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, at a reasonable assurance level.

Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Part II.		OTHER INFORMATION


ITEM 1.	Legal Proceedings


ITEM 1A.	Risk Factors

In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risks described in our Annual Report on Form 10-K filed for the year ended December 31, 201 8 , in Part I, Item 1A, Risk Factors, and in our other filings with the SEC. These factors may materially affect our business, financial condition and operating results and could cause our actual results to differ materially from expectations. In addition, in considering the forward-looking statements contained in this Form 10-Q and elsewhere, you should refer to the qualifications and limitations on our forward-looking statements that are described in Forward Looking Statements at the beginning of Part I, Item 2 of this Form 10-Q.


ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Common Share Repurchases

Our Board has authorized management to repurchase up to 35,000,000 of our common shares on the open market or in privately negotiated transactions. From the inception of the repurchase program through May 1, 2019 , we have repurchased a total of 23,721,916 common shares (all purchased prior to 2010) at an aggregate cost of approximately $679.1 million. Our common share repurchase program does not have an expiration date and there are 11,278,084 common shares that may yet be repurchased under our repurchase program as of March 31, 2019 . We have no current plans to repurchase shares; however, future levels of common share repurchases will be dependent upon our available capital, investment alternatives, and the trading price of our common shares.

Preferred Share Redemptions

We redeemed, pursuant to our option to redeem such shares, 11,400,000 of our Series Y preferred shares in March 2019, at $25.00 per share.


ITEM 6.	Exhibits

Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index which is incorporated herein by reference.



	PUBLIC STORAGE
	INDEX TO EXHIBITS (1)
	(Items 15(a)(3) and 15(c))


3.1	Articles Supplementary for the 5.600% Cumulative Preferred Shares of Beneficial Interest , Series H (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K file d on March 1 , 2019 and incorporated herein by reference ).

4.1	Second Supplemental Indenture, dated as of April 12, 2019, between Public Storage and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on April 12, 2019 and incorporated herein by reference).

10.1	Second Amended and Restated Credit Agreement, dated as of April 19, 2019, by and among the Company, the financial institutions party thereto and their permitted assigns, Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo Bank, National Association, as Administrative Agent, and Bank of America, N.A., as Syndication Agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 19, 2019 and incorporated herein by reference).

31.1	Rule 13a – 14(a) Certification. Filed herewith.

31.2	Rule 13a – 14(a) Certification. Filed herewith.

32	Section 1350 Certifications. Filed herewith.

101 .INS	XBRL Instance Document. Filed herewith.

101 .SCH	XBRL Taxonomy Extension Schema. Filed herewith.

101 .CAL	XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.

101 .DEF	XBRL Taxonomy Extension Definition Linkbase. Filed herewith.

101 .LAB	XBRL Taxonomy Extension Label Linkbase. Filed herewith.

101 .PRE	XBRL Taxonomy Extension Presentation Link. Filed herewith.

_ (1) SEC	File No. 001-33519 unless otherwise indicated.

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

4
		DATED: May 1, 2019 PUBLIC STORAGE

		By: /s/ H. Thomas Boyle
		H. Thomas Boyle Senior Vice President & Chief Financial Officer (Principal financial officer and duly authorized officer)


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)


Large accelerated filer	Accelerated filer	Non-accelerated filer	Smaller reporting company	Emerging growth company
[X]	[ ]	[ ]	[ ]	[ ]


PART I	FINANCIAL INFORMATION	Pages

Item 1.	Financial Statements (Unaudited)

	Balance Sheets at March 31, 2019 and December 31, 201 8	1

	Statements of Income for the Three Months Ended March 31 , 201 9 and 201 8	2

	Statements of Comprehensive Income for the Three Months Ended March 31 , 201 9 and 201 8	3

	Statement s of Equity for the Three Months E nded March 31, 2019 and 2018	4-5

	Statements of Cash Flows for the Three Months E nded March 31, 2019 and 201 8	6-7

	Condensed Notes to Financial Statements	8-26

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27-55

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4.	Controls and Procedures	56

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

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

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

Item 6.	Exhibits	57


	Unsecured		Mortgage
	Debt		Debt		Total


Remainder of 2019	$	-	$	1,448	$	1,448
2020		-		2,015		2,015
2021		-		1,890		1,890
2022		500,000		2,584		502,584
2023		-		19,226		19,226
Thereafter		883,690		1,584		885,274
	$	1,383,690	$	28,747	$	1,412,437
Weighted average effective rate		2.6%		4.0%		2.6%