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

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") discusses our financial statements, which have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP"). The amounts reported in our financial statements, notes to financial statements and MD&A are affected by judgments, assumptions and estimates that we make. The notes to our December 31, 2012 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 real estate investment trust ("REIT"), as defined in the Internal Revenue 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 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, our taxable REIT subsidiaries are taxable as regular corporations. To the extent that amounts paid to us by our taxable REIT subsidiaries are determined by the taxing authorities to be in excess of amounts that would be paid under similar arrangements among unrelated parties, we could be subject to a 100% penalty tax on the excess payments. 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 determination of fair values, all of which require significant judgment and subjectivity. Others could come to materially different conclusions, and 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.

Accruals for Operating Expenses: Certain of our expenses are estimated based upon assumptions regarding past and future trends, such as losses for workers compensation, employee health plans, and estimated claims for our tenant reinsurance program. In certain jurisdictions we do not receive property tax bills for the current fiscal year until after our earnings are finalized, and as a result, we must estimate property tax expense based upon anticipated implementation of regulations and trends. If our related estimates and assumptions are incorrect, our expenses could be misstated.

Accruals for Contingencies: We are subject to business and legal liability risks due to events that have occurred, which could result in future payments. We have not accrued certain of these payments, either because they are not probable or not estimable, or because we are not aware of them. We may have to accrue additional amounts for these payments due to the results of further investigation, the litigation process, or otherwise. Such accruals could have a material adverse impact on our net income.

Recording the fair value of acquired real estate facilities: In recording the acquisition of real estate facilities, we estimate the fair value of the land, buildings and intangible assets acquired. Such estimates are based upon many assumptions and judgments, including expected rates of return, land and building replacement costs, as well as future cash flows from the property 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 of Management's Discussion and Analysis of Operations

Our domestic self-storage facilities generated 93% of our revenues for the year ended December 31, 2012, and also generated most of our net income and cash flow from operations. A large portion of management time is devoted to maximizing cash flows from our existing self-storage facilities, as well as seeking to acquire and develop additional investments in 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 effectively meet such challenges.

In 2010, 2011, and 2012, we acquired an aggregate of 77 self-storage facilities from third parties for approximately $546 million, we acquired noncontrolling interests in subsidiaries owning self-storage facilities for approximately $197 million, and we invested $117 million in Shurgard Europe which it used to acquire interests in self-storage facilities. We will continue to seek to acquire additional self-storage facilities from third parties in 2013. There is significant competition to acquire existing facilities and there can be no assurance that we will be able to acquire additional facilities.

Over the past three years our development activities have been minimal. We have recently expanded our development efforts due in part to the significant increase in prices being paid for existing facilities, in many cases well above the cost of developing new facilities. At December 31, 2012, we had a development pipeline of projects to expand existing self-storage facilities and develop new self-storage facilities, which will add approximately 1.3 million net rentable square feet of self-storage space. The aggregate cost of these projects is estimated at $169 million, of which $36 million had been incurred at December 31, 2012, and the remaining costs will be incurred principally in 2013. Some of these projects are subject to significant contingencies such as entitlement approval. We expect to continue to seek additional development projects and have hired additional personnel; however, due to the difficulty in finding projects that meet our risk-adjusted yield expectations, as well as the difficulty in obtaining building permits for self-storage activities in certain municipalities, it is uncertain as to how much additional development we will undertake in the future.

We also have equity investments in Shurgard Europe, interests in commercial operations primarily through our investment in PS Business Parks, Inc. ("PSB"), and ancillary operations such as tenant reinsurance and sales of merchandise. We have no current plans to change our equity investments in Shurgard Europe or PSB; however, it is possible that we may make additional investments in these entities in the future.

We believe that we are not dependent upon raising capital to fund our ongoing operations or meet our obligations. However, access to capital is important to growing our asset base. During the years ended December 31, 2012 and 2011, we issued approximately $1.7 billion and $863 million, respectively, of preferred securities. During December 2012, we raised $101 million from the sale of our common shares owned by a wholly-owned subsidiary. We have no current plans to issue additional common shares. On January 16, 2013, we issued another $500 million of preferred securities.

At December 31, 2012, cash and cash equivalents totaled $17.2 million and we had $133.0 million in borrowings on our line of credit. On January 16, 2013, we raised $485 million in net proceeds from the issuance of our 5.2% Series W Preferred Shares and repaid the outstanding borrowings on our line of credit. We have $255 million in scheduled principal repayments in 2013, including $186 million for our senior notes which mature on March 15, 2013. At December 31, 2012, we have a pipeline of development projects with approximately $133 million in remaining spending. We have no other significant commitments in 2013.

Results of Operations

Operating results for 2012 as compared to 2011: For the year ended December 31, 2012, net income allocable to our common shareholders was $669.7 million or $3.90 per diluted common share, compared to $561.7 million or $3.29 per diluted common share for the same period in 2011, representing an increase of $108.0 million or $0.61 per diluted common share. This increase is due to (i) improved property operations, (ii) a $19.6 million reduction in distributions to preferred shareholders due primarily to lower average coupon rates, and (iii) a $16.2 million increase resulting from foreign currency exchange gains and losses in translating our Euro-denominated loan receivable from Shurgard Europe into U.S. Dollars, offset partially by (iv) a $36.3 million decrease due to the application of EITF D-42 to our, and our equity share of PSB's, redemptions of preferred securities.

Operating results for 2011 as compared to 2010: For the year ended December 31, 2011, net income allocable to our common shareholders was $561.7 million or $3.29 per diluted common share, compared to $399.2 million or $2.35 per diluted common share for the same period in 2010, representing an increase of $162.5 million or $0.94 per diluted common share. This increase is due to (i) improved property operations, (ii), a $35.0 million increase due to foreign currency exchange gains and losses in translating our Euro-denominated loan receivable from Shurgard Europe into U.S. Dollars, (iii) increased equity in earnings and interest and other income from Shurgard Europe, due primarily to Shurgard Europe's acquisition of its joint venture partner's interests on March 2, 2011 and (iv) reduced income allocations to our Equity Shares, Series A.

Funds from Operations

Funds from Operations ("FFO") is a term defined by the National Association of Real Estate Investment Trusts, and generally represents net income before depreciation, gains and losses, and impairment charges with respect to real estate assets. We present FFO and FFO per share because we consider FFO to be an important measure of the performance of real estate companies, as do many analysts in evaluating our Company. We believe that FFO is a helpful measure of a REIT's performance since FFO excludes depreciation, which is included in computing net income and assumes the value of real estate diminishes predictably over time. We believe that real estate values fluctuate due to market conditions and in response to inflation. FFO computations do not consider scheduled principal payments on debt, capital improvements, distributions and other obligations of the Company. FFO and FFO per share is not a substitute for our cash flow or net income per share as a measure of our liquidity or operating performance or our ability to pay dividends. Because other REITs may not compute FFO in the same manner; FFO may not be comparable among REITs. The following table reconciles from net income to FFO allocable to common shares and computes FFO per common share. Amounts previously presented for 2010 have been adjusted to eliminate impairment charges with respect to real estate assets.

                                                                         Year Ended December 31,
                                                               2012                  2011               2010
                                                              (Amounts in thousands, except per share data)
Computation of FFO allocable to Common Shares:
Net income                                                $       943,035       $       836,459      $   696,114
Add back - depreciation and amortization, including
amounts classified as discontinued operations                     358,103               358,525          354,386
Add back - depreciation from unconsolidated real estate
investments                                                        75,648                64,677           61,110
Eliminate - gains on sale and impairment charges
related to real estate investments, including
discontinued operations and our equity share of
unconsolidated real estate investments                            (14,778 )             (12,797 )         (7,573 )
FFO allocable to equity holders                                 1,362,008             1,246,864        1,104,037
Less allocation of FFO to:
Noncontrolling equity
interests                                                          (6,828 )             (15,539 )        (25,915 )
Preferred shareholders                                           (266,937 )            (260,462 )       (240,634 )
Equity Shares, Series
A                                                                       -                     -          (30,877 )
Restricted share
unitholders                                                        (4,247 )              (2,817 )         (2,645 )
FFO allocable to Common Shares                            $     1,083,996       $       968,046      $   803,966
Diluted weighted average common shares outstanding                171,664               170,750          169,772
FFO per share                                             $          6.31       $          5.67      $      4.74

In discussions with the investment community, we often discuss "Core FFO" per share, which represents FFO per share, adjusted to exclude the impact of i) foreign currency gains and losses, representing a gain of $8.9 million in 2012, and losses totaling $7.3 million and $42.3 million in 2011 and 2010, respectively, ii) EITF D-42 income allocations, including our equity share of PSB, representing a reduction of FFO totaling $68.9 million, $32.6 million and $35.8 million in 2012, 2011 and 2010, respectively, and ii) the aggregate net impact of impairment charges with respect to non-real estate assets, contingency accruals, our equity share of PSB's lease termination benefits, and costs associated with the acquisition of real estate facilities, representing an aggregate net reduction in FFO per share of $0.02, $0.03 and $0.02 in 2012, 2011 and 2010, respectively.

We present Core FFO per share because we believe it is a helpful measure in understanding our results of operations, as we believe that the items noted above that are included in FFO per share, but excluded from Core FFO per share, are not indicative of our ongoing earnings. We also believe that the analyst community, likewise, reviews our Core FFO (or similar measures using different terminology) when evaluating our Company. Core FFO is not a substitute for net income, earnings per share or cash flow from operations. Because other REITs may not compute Core FFO in the same manner as we do, may not use the same terminology, or may not present such a measure, Core FFO may not be comparable among REITs.

The following table reconciles from FFO per share to Core FFO per share:

                                                      Year Ended December 31,
                                                    Percentage                                  Percentage
                          2012          2011          Change          2011          2010          Change
FFO per share           $    6.31     $    5.67            11.3 %   $    5.67     $    4.74            19.6 %
Eliminate the per
share impact of items
excluded from Core
FFO:
Foreign currency
exchange (gain) loss        (0.05 )        0.04                          0.04          0.25
Application of EITF
D-42                         0.40          0.19                          0.19          0.21
Other items, net             0.02          0.03                          0.03          0.02
Core FFO per share      $    6.68     $    5.93            12.6 %   $    5.93     $    5.22            13.6 %

Real Estate Operations


Self-Storage Operations: Our self-storage operations represent 93% of our
revenues for the year ended December 31, 2012. Our self-storage operations are
analyzed in two groups: (i) the Same Store Facilities, representing the
facilities that we have owned and operated on a stabilized basis since January
1, 2010, and (ii) all other facilities, which are newly acquired, newly
developed, or recently expanded facilities (the "Non Same Store Facilities").

Self-Storage Operations
Summary                                Year Ended December 31,                          Year Ended December 31,
                                                             Percentage                                       Percentage
                                2012            2011           Change            2011            2010           Change
                                                            (Dollar amounts in thousands)
Revenues:
Same Store Facilities        $ 1,596,320     $ 1,522,055             4.9 %    $ 1,522,055     $ 1,454,633             4.6 %
Non Same Store Facilities        106,770          81,469            31.1 %         81,469          54,763            48.8 %
Total rental
income                         1,703,090       1,603,524             6.2 %      1,603,524       1,509,396             6.2 %
Cost of operations:
Same Store Facilities            468,752         477,041            (1.7 )%       477,041         474,831             0.5 %
Non Same Store Facilities         33,114          27,797            19.1 %         27,797          19,884            39.8 %
Total cost of operations         501,866         504,838            (0.6 )%       504,838         494,715             2.0 %
Net operating income (a):
Same Store Facilities          1,127,568       1,045,014             7.9 %      1,045,014         979,802             6.7 %
Non Same Store Facilities         73,656          53,672            37.2 %         53,672          34,879            53.9 %
Total net operating income     1,201,224       1,098,686             9.3 %      1,098,686       1,014,681             8.3 %
Total depreciation and
amortization expense:
Same Store Facilities           (313,173 )      (319,033 )          (1.8 )%      (319,033 )      (316,199 )           0.9 %
Non Same Store Facilities        (41,798 )       (36,282 )          15.2 %        (36,282 )       (34,426 )           5.4 %
Total depreciation and
amortization expense            (354,971 )      (355,315 )          (0.1 )%      (355,315 )      (350,625 )           1.3 %

Total net
income                       $   846,253     $   743,371            13.8 %    $   743,371     $   664,056            11.9 %


Number of facilities at
period end:
Same Store Facilities              1,941           1,941               -            1,941           1,941               -
Non Same Store Facilities            124              97            27.8 %             97              83            16.9 %
Net rentable square
footage at period end (in
thousands):
Same Store Facilities            122,464         122,464               -          122,464         122,464               -
Non Same Store Facilities          9,173           6,997            31.1 %          6,997           5,684            23.1 %

(a) See "Net Operating Income below for further information regarding this non-GAAP measure.

Same Store Facilities

The Same Store Facilities represent those 1,941 facilities (122,464,000 net
rentable square feet) that have been owned and operated on a stabilized basis
since January 1, 2010, and therefore provide meaningful comparisons for 2010,
2011 and 2012. The following table summarizes the historical operating results
of these facilities:

SAME STORE FACILITIES                             Year Ended December 31,                             Year Ended December 31,
                                                                          Percentage                                          Percentage
                                           2012             2011            Change             2011             2010            Change
Revenues:                                                (Dollar amounts in thousands, except weighted average amounts)
Rental
income                                 $  1,516,152     $  1,442,684              5.1 %    $  1,442,684     $  1,383,232              4.3 %
Late charges and administrative
fees                                         80,168           79,371              1.0 %          79,371           71,401             11.2 %
Total revenues (a)                        1,596,320        1,522,055              4.9 %       1,522,055        1,454,633              4.6 %

Cost of operations:
Property taxes                              151,605          147,259              3.0 %         147,259          144,502              1.9 %
On-site property manager
payroll                                      97,942          101,034             (3.1 )%        101,034           99,928              1.1 %
Repairs and maintenance                      39,998           45,237            (11.6 )%         45,237           46,201             (2.1 )%
Utilities                                    36,255           37,732             (3.9 )%         37,732           36,299              3.9 %
Media advertising                             6,326           10,542            (40.0 )%         10,542           15,178            (30.5 )%
Other advertising and selling
expense                                      32,423           32,133              0.9 %          32,133           31,991              0.4 %
Other direct property costs                  35,257           35,937             (1.9 )%         35,937           36,810             (2.4 )%
Supervisory payroll                          33,144           32,038              3.5 %          32,038           29,828              7.4 %
Allocated overhead                           35,802           35,129              1.9 %          35,129           34,094              3.0 %
Total cost of operations (a)                468,752          477,041             (1.7 )%        477,041          474,831              0.5 %
Net operating income (b)                  1,127,568        1,045,014              7.9 %       1,045,014          979,802              6.7 %
Depreciation and amortization
expense                                    (313,173 )       (319,033 )           (1.8 )%       (319,033 )       (316,199 )            0.9 %
Net income                             $    814,395     $    725,981             12.2 %    $    725,981     $    663,603              9.4 %
Gross margin (before depreciation
and amortization expense)                      70.6 %           68.7 %            2.8 %            68.7 %           67.4 %            1.9 %

Weighted average for the period:
Square foot occupancy (c)                      91.8 %           91.2 %            0.7 %            91.2 %           89.8 %            1.6 %
Realized annual rent, prior to late
charges and administrative fees,
per:
Occupied square foot (d)(e)            $      13.49     $      12.92              4.4 %    $      12.92     $      12.58              2.7 %
Available square foot ("REVPAF")
(e)(f)                                 $      12.38     $      11.78              5.1 %    $      11.78     $      11.30              4.2 %
Weighted average at December 31:
Square foot occupancy                          91.4 %           89.6 %            2.0 %            89.6 %           88.7 %            1.0 %
In place annual rent per occupied
square foot (g)                        $      14.42     $      14.02              2.9 %    $      14.02     $      13.65              2.7 %

a) Revenues and cost of operations do not include tenant reinsurance and retail operations, which are included on our income statement under "ancillary revenues" and "ancillary operating expenses."

b) See "Net Operating Income" below for a reconciliation of this non-GAAP measure to our net income in our statements of income for the years ended December 31, 2012, 2011 and 2010.

c) Square foot occupancies represent weighted average occupancy levels over the entire period.

d) Realized annual rent per occupied square foot is computed by dividing annualized rental income, before late charges and administrative fees, by the weighted average occupied square feet for the period.

e) 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.

f) Realized annual rent per available square foot ("REVPAF") is computed by dividing annualized rental income, before late charges and administrative fees, by the total available net rentable square feet for the period.

g) In place annual rent per occupied square foot represents annualized contractual rents per occupied square foot before any reductions for promotional discounts, and excludes late charges and administrative fees.

Analysis of Revenue

Revenues generated by our Same Store Facilities increased by 4.9% in 2012 as compared to 2011 due primarily to increased average rental rates charged to our tenants. This increase was due primarily to annual rent increases for tenants that have been renting longer than one year combined with a reduction in promotional discounts given to new tenants from $96.5 million in 2011 to $87.8 million in 2012.

Revenues generated by our Same Store Facilities increased by 4.6% in 2011 as compared to 2010. The increase was due primarily to a 1.6% increase in weighted average square foot occupancy and a 2.7% increase in realized rent per occupied square foot, as well as an 11.2% increase in late charges and administrative fees due primarily to increases in the fee levels charged for late payments. The increase in realized annual rent per occupied square foot includes the impact of more aggressive increases in rents charged to existing tenants in the last two quarters of 2011.

Our future rental growth will be dependent upon many factors including the level of new supply of self-storage space in the markets in which we operate, demand for self-storage space, our ability to increase rental rates, the level of promotional activities, and our ability to maintain or improve our occupancy levels.

. . .