Published: 2021-11-01 00:00:00 ET

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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 that offer storage spaces for lease, generally on a month-to-month basis, for personal and business use, ancillary activities such as tenant reinsurance to the tenants at our self-storage facilities, merchandise sales, and third party management, as well as the acquisition and development of additional self-storage space.

At September 30, 2021, we have direct and indirect equity interests in 2,678 self-storage facilities (with approximately 186.4 million net rentable square feet) located in 39 states in the United States (“U.S.”) operating under the Public Storage® name, and 0.9 million net rentable square feet of commercial and retail space.

We own an approximate 35% common equity interest in Shurgard Self Storage SA (“Shurgard”), a public company traded on Euronext Brussels under the “SHUR” symbol, which owns 247 self-storage facilities (with approximately 13 million net rentable square feet) located in seven Western European countries, all operating under the Shurgard® name. We also own an approximate 42% common equity interest in PS Business Parks, Inc. (“PSB”), a REIT traded on the New York Stock Exchange under the “PSB” symbol, which owns 28 million net rentable square feet of commercial properties, primarily multi-tenant industrial, flex, and office space, located in six states.

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, primarily of a normal recurring nature, that are necessary to present fairly 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, 2020.

Certain amounts previously reported in our September 30, 2020 financial statements have been reclassified to conform to the September 30, 2021 presentation, including revenues and cost operations from our third party management activities of $3.9 million and $3.8 million, respectively, for the three months ended September 30, 2020, and $10.5 million and $10.0 million, respectively, for the nine months ended September 30, 2020, previously reported within interest and other income. This reclassification had no impact on our balance sheet, statements of comprehensive income, statements of equity, or cash flows as of and for the three and nine months ended September 30, 2020.

Additionally, we corrected our prior period financial statement presentation of share-based compensation expense and dividends paid on restricted share units (“RSUs”) between general and administrative expense and self-storage cost of operations. As a result, we revised our statements of income for the three and nine months ended September 30, 2020 with an increase in self-storage cost of operations of $3.1 million and $9.4 million, respectively, and a corresponding decrease to general and administrative expenses. This immaterial correction had no impact on our total expenses or net income. The correction also had no impact on our balance sheet, statements of comprehensive income, statements of equity, or cash flows as of and for the three and nine months ended September 30, 2020.

Summary of Significant Accounting Policies

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

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activities most significantly impacting economic performance, and (ii) either the obligation to absorb losses or the right to receive benefits from the VIE. At June 30, 2021, we were the primary beneficiary of, and therefore consolidated through contractual rights, three limited liability companies that were considered VIEs, which owned 48 self-storage properties acquired on April 28, 2021 known as the ezStorage portfolio. During the third quarter of 2021, we became the sole member of these three limited liability companies and therefore consolidated them through our voting interests. Accordingly, we have no involvement with any material VIEs as of September 30, 2021. We consolidate all other entities when we control them through voting shares or contractual rights. We refer to the entities we consolidate, for the period in which the reference applies, collectively as the “Subsidiaries,” and we eliminate intercompany transactions and balances.

We account for our investments in entities that we do not consolidate but over which we have significant influence using the equity method of accounting. We refer to these entities, for the periods in which the reference applies, collectively as the “Unconsolidated Real Estate Entities,” and we eliminate intra-entity profits and losses and amortize 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 presented on our income statements represents our pro-rata share of the earnings of the Unconsolidated Real Estate Entities. The dividends we receive from the Unconsolidated Real Estate Entities are reflected on our statements of cash flows as “distributions from cumulative equity in earnings of unconsolidated real estate entities” to the extent of our cumulative equity in earnings, with any excess classified as “distributions in excess of cumulative equity in earnings from unconsolidated real estate entities.”

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”). For each taxable year in which we qualify for taxation as a REIT, we will not be subject to U.S. federal corporate income tax on our “REIT taxable income” (generally, taxable income subject to specified adjustments, including a deduction for dividends paid and excluding our net capital gain) that is distributed to our shareholders. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no U.S. federal corporate income tax expense related to our REIT taxable income.

Our tenant reinsurance, merchandise, and third party management 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 September 30, 2021, we had no tax benefits that were not recognized.

Real Estate Facilities

We record real estate facilities 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 expense the costs of demolition of existing facilities associated with a renovation as incurred. 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.

We expense costs associated with dispositions of real estate, as well as repairs and maintenance costs, 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 a controlling interest following the sale, we record a noncontrolling interest for the book value of the partial interest sold, and

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recognize additional paid-in capital for the difference between the consideration received and the partial interest at book value.

Other Assets

Other assets primarily consist of right-of-use assets, prepaid costs and expenses, restricted cash, reinsurance premium receivables, and rent receivables from our tenants (net of an allowance for uncollectible amounts).

Accrued and Other Liabilities

Accrued and other liabilities consist primarily of property tax accruals, trade and construction payables, rents prepaid by our tenants, lease liabilities, accrued tenant reinsurance losses, and accrued payroll. 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. Because our estimates of fair value involve considerable judgment, including determination of the factors that market participants would consider in negotiating exchange values, such estimates may be limited in their ability to reflect what would actually be realized in an actual market exchange.

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. Such 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 (net of an allowance for uncollectible receivables based upon expected losses in the portfolio) 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.

At September 30, 2021, due primarily to our investment in Shurgard (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 consist of goodwill, the Shurgard® trade name, and finite-lived assets.

Goodwill totaled $165.8 million at September 30, 2021 ($165.8 million at December 31, 2020). The Shurgard® trade name, which Shurgard uses pursuant to a fee-based licensing agreement, has a book value of

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$18.8 million at September 30, 2021 and December 31, 2020. Goodwill and the Shurgard® trade name have indefinite lives and are not amortized.

Our finite-lived assets consist primarily of (i) acquired customers in place amortized relative to the benefit of the customers in place, with such amortization reflected as depreciation and amortization expense on our income statement and (ii) property tax abatements acquired and amortized relative to the reduction in property tax paid, with such amortization reflected as self-storage cost of operations on our income statement. At September 30, 2021, these intangibles had a net book value of $74.4 million ($20.1 million at December 31, 2020). Accumulated amortization totaled $59.4 million at September 30, 2021 ($27.3 million at December 31, 2020). A total of $23.3 million and $49.0 million in amortization expense was recorded in the three and nine months ended September 30, 2021, respectively, and $3.0 million and $12.0 million in the same periods in 2020.

The estimated future amortization expense for our finite-lived intangible assets at September 30, 2021 is approximately $18.7 million in the remainder of 2021, $39.1 million in 2022 and $16.6 million thereafter. During the nine months ended September 30, 2021, intangibles increased $103.3 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 quarterly. 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.

Revenue and Expense Recognition

We recognize revenues from self-storage facilities, which primarily comprise rental income earned pursuant to month-to-month leases, as well as associated late charges and administrative fees, as earned. Promotional discounts reduce rental income over the promotional period, which is generally one month. We recognize ancillary revenues 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. We expense cost of operations (including advertising expenditures), general and administrative expense, and interest expense 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. 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).

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When financial instruments denominated in a currency other than the U.S. Dollar are expected to be settled in cash in the foreseeable 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 1.159 U.S. Dollars per Euro at September 30, 2021 (1.226 at December 31, 2020), and average exchange rates of 1.179 and 1.168 for the three months ended September 30, 2021 and 2020, respectively, and average exchange rates of 1.196 and 1.124 for the nine months ended September 30, 2021 and 2020, respectively.

Comprehensive Income

Total comprehensive income represents net income, adjusted for changes in other comprehensive income (loss) for the applicable period, which primarily comprised of foreign currency translation gains and losses on our investment in Shurgard.

Net Income per Common Share

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

We calculate basic and diluted net income per common share 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):

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Weighted average common shares and equivalents outstanding:
Basic weighted average common shares outstanding			174,926						174,503						174,787						174,481
Net effect of dilutive stock options - based on treasury stock method			880						123						611						125
Diluted weighted average common shares outstanding			175,806						174,626						175,398						174,606

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Activity in real estate facilities during the nine months ended September 30, 2021 is as follows:

			Nine Months Ended September 30, 2021
			(Amounts in thousands)
Operating facilities, at cost:
Beginning balance			$	17,372,627
Capital expenditures to maintain real estate facilities			177,641
Acquisitions			2,741,952
Dispositions			(6,783)
Developed or expanded facilities opened for operation			171,086
Ending balance			20,456,523
Accumulated depreciation:
Beginning balance			(7,152,135)
Depreciation expense			(450,757)
Dispositions			4,396
Ending balance			(7,598,496)
Construction in process:
Beginning balance			188,079
Costs incurred to develop and expand real estate facilities			211,386
Developed or expanded facilities opened for operation			(171,086)
Ending balance			228,379
Total real estate facilities at September 30, 2021			$	13,086,406

During the nine months ended September 30, 2021, we acquired 126 self-storage facilities (10,295,000 net rentable square feet of storage space), for a total cost of $2.8 billion in cash. Approximately $103.3 million of the total cost was allocated to intangible assets. We completed development and redevelopment activities costing $171.1 million during the nine months ended September 30, 2021, adding 1.2 million net rentable square feet of self-storage space. Construction in process at September 30, 2021 consists of projects to develop new self-storage facilities and expand existing self-storage facilities.

During the nine months ended September 30, 2021, our accrual for unpaid construction costs increased $7.4 million (a $2.9 million increase for the same period in 2020). During the nine months ended September 30, 2021, our accrual for capital expenditures to maintain real estate facilities increased $7.9 million (a $6.9 million decrease for the same period in 2020).

During the nine months ended September 30, 2021, we sold portions of real estate facilities in connection with eminent domain proceedings for $16.1 million in cash proceeds and recorded a related gain on sale of real estate of approximately $13.7 million.

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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
			September 30, 2021						December 31, 2020
PSB			$	451,336					$	431,963
Shurgard			327,936						341,083
Total			$	779,272					$	773,046

			Equity in Earnings of Unconsolidated Real Estate Entities for the
			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
PSB			$	27,110					$	16,548					$	62,494					$	51,513
Shurgard			5,750						4,692						18,888						11,350
Total			$	32,860					$	21,240					$	81,382					$	62,863

Investment in PSB

Throughout all periods presented, we owned 7,158,354 shares of PSB’s common stock and 7,305,355 limited partnership units in an operating partnership controlled by PSB, representing an approximate 42% common equity interest. The limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock.

Based upon the closing price at September 30, 2021 ($156.74 per share of PSB common stock), the shares and units we owned had a market value of approximately $2.3 billion.

Our equity in earnings of PSB comprised our equity share of PSB’s net income, less amortization of the PSB Basis Differential (defined below).

During each of the nine month periods ended September 30, 2021 and 2020, we received cash distributions from PSB totaling $45.6 million.

At September 30, 2021, our pro-rata investment in PSB’s real estate assets included in investment in unconsolidated real estate entities exceeds our pro-rata share of the underlying amounts on PSB’s balance sheet by approximately $2.8 million ($3.4 million at December 31, 2020). 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 $0.6 million during each of the nine month periods ended September 30, 2021 and 2020.

PSB is a publicly held entity traded on the New York Stock Exchange under the symbol “PSB”.

Investment in Shurgard

Throughout all periods presented, we effectively owned, directly and indirectly 31,268,459 Shurgard common shares, representing an approximate 35% equity interest in Shurgard.

Based upon the closing price at September 30, 2021 (€47.35 per share of Shurgard common stock, at 1.159 exchange rate of US Dollars to the Euro), the shares we owned had a market value of approximately $1.7 billion.

Our equity in earnings of Shurgard comprised our equity share of Shurgard’s net income, less amortization of the Shurgard Basis Differential (defined below). We eliminated $0.9 million and $0.8 million intra-entity profits and losses for the nine month periods ended September 30, 2021 and 2020, respectively, representing our equity share of

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the trademark license fees that Shurgard pays to us for the use of the Shurgard® trademark. We classify the remaining license fees we receive from Shurgard as interest and other income on our income statement.

The dividends we receive from Shurgard, combined with our equity share of trademark license fees collected from Shurgard, are reflected on our statements of cash flows as “distributions from cumulative equity in earnings of unconsolidated real estate entities” to the extent of our cumulative equity in earnings, with any excess classified as “distributions in excess of cumulative equity in earnings from unconsolidated real estate entities.” Shurgard paid €0.57 per share and €0.50 per share in dividends to its shareholders during the nine months ended September 30, 2021 and 2020, respectively, of which our share totaled $21.5 million and $17.0 million, respectively.

At September 30, 2021, our pro-rata investment in Shurgard’s real estate assets included in investment in unconsolidated real estate entities exceeds our pro-rata share of the underlying amounts on Shurgard’s balance sheet by approximately $75.8 million ($83.1 million at December 31, 2020). This differential (the “Shurgard Basis Differential”) includes our cost basis adjustment in Shurgard’s real estate assets net of related deferred income taxes. The real estate assets basis differential is being amortized as a reduction to equity in earnings of the Unconsolidated Real Estate Entities. Such amortization totaled approximately $7.3 million and $9.5 million during the nine month periods ended September 30, 2021 and 2020, respectively.

As of September 30, 2021 and 2020, we translated the book value of our investment in Shurgard from Euro to U.S. Dollar and recorded $9.6 million other comprehensive loss and $2.5 million other comprehensive income during the nine month periods ended September 30, 2021 and 2020, respectively.

Shurgard is a publicly held entity trading on Euronext Brussels under the symbol “SHUR”.

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Our notes payable are reflected net of issuance costs (including original issue discounts), which are amortized as interest expense on the effective interest method over the term of each respective note. Our notes payable at September 30, 2021 and December 31, 2020 are set forth in the tables below:

															Amounts at September 30, 2021
			Coupon Rate						Effective Rate						Principal						Unamortized Costs						Book  Value						Fair  Value
															($ amounts in thousands)
U.S. Dollar Denominated Unsecured Debt
Notes due September 15, 2022			2.370%						2.483%						$	500,000					$	(495)					$	499,505					$	509,800
Notes due April 23, 2024			SOFR+0.47%						0.596%						700,000						(1,804)						698,196						704,200
Notes due February 15, 2026			0.875%						1.030%						500,000						(3,246)						496,754						493,515
Notes due September 15, 2027			3.094%						3.218%						500,000						(3,152)						496,848						546,757
Notes due May 1, 2028			1.850%						1.962%						650,000						(4,446)						645,554						653,619
Notes due May 1, 2029			3.385%						3.459%						500,000						(2,334)						497,666						549,252
Notes due May 1, 2031			2.300%						2.419%						650,000						(6,554)						643,446						658,400
															4,000,000						(22,031)						3,977,969						4,115,543
Euro Denominated Unsecured Debt
Notes due April 12, 2024			1.540%						1.540%						115,896						—						115,896						120,868
Notes due November 3, 2025			2.175%						2.175%						280,484						—						280,484						303,644
Notes due September 9, 2030			0.500%						0.640%						811,272						(10,010)						801,262						795,777
Notes due January 24, 2032			0.875%						0.978%						579,480						(5,528)						573,952						581,103
															1,787,132						(15,538)						1,771,594						1,801,392
Mortgage Debt, secured by 27 real estate facilities with a net book value of $96.6 million			3.905%						3.903%						23,627						—						23,627						24,939
															$	5,810,759					$	(37,569)					$	5,773,190					$	5,941,874

			Amounts at
			December 31, 2020
			Book Value						Fair Value
			($ amounts in thousands)
U.S. Dollar Denominated Unsecured Debt
Notes due September 15, 2022			$	499,109					$	517,419
Notes due September 15, 2027			496,452						560,833
Notes due May 1, 2029			497,433						574,833
			1,492,994						1,653,085
Euro Denominated Unsecured Debt
Notes due April 12, 2024			122,646						129,192
Notes due November 3, 2025			296,821						323,552
Notes due January 24, 2032			607,301						634,389
			1,026,768						1,087,133
Mortgage Debt			25,230						26,958
			$	2,544,992					$	2,767,176

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U.S. Dollar Denominated Unsecured Notes

On January 19, 2021, we completed a public offering of $500 million aggregate principal amount of senior notes bearing interest at an annual rate of 0.875% and maturing on February 15, 2026. Interest on the senior notes is payable semi-annually, commencing on August 15, 2021. In connection with the offering, we incurred $3.8 million in costs.

On April 23, 2021, we completed a public offering of $700 million, $650 million and $650 million aggregate principal amount of senior notes bearing interest at an annual rate of the compounded Secured Overnight Financing Rate (“SOFR”) + 0.47% (reset quarterly and at 0.495% as of September 30, 2021), 1.85% and 2.30%, respectively, and maturing on April 23, 2024, May 1, 2028 and May 1, 2031, respectively. Interest on the 2024 notes is payable quarterly, commencing on July 23, 2021. Interest on the 2028 notes and 2031 notes is payable semi-annually, commencing on November 1, 2021. In connection with the offering, we incurred a total of $13.7 million in costs.

The U.S. Dollar Denominated Unsecured Notes have various financial covenants, with which we were in compliance at September 30, 2021. Included in these covenants are (a) a maximum Debt to Total Assets of 65% (approximately 14% at September 30, 2021) and (b) a minimum ratio of Adjusted EBITDA to Interest Expense of 1.5x (approximately 33x for the twelve months ended September 30, 2021) as well as covenants limiting the amount we can encumber our properties with mortgage debt.

Euro Denominated Unsecured Notes

Our Euro denominated unsecured notes (the “Euro Notes”) consist of four tranches: (i) €242.0 million issued to institutional investors on November 3, 2015 for $264.3 million in net proceeds upon converting the Euros to U.S. Dollars, (ii) €100.0 million issued to institutional investors on April 12, 2016 for $113.6 million in net proceeds upon converting the Euros to U.S. Dollars, (iii) €500.0 million issued in a public offering on January 24, 2020 for $545.2 million in net proceeds upon converting the Euros to U.S. Dollars, and (iv) €700.0 million issued in a public offering on September 9, 2021 for $817.6 million in net proceeds upon converting the Euros to U.S. Dollars. Interest is payable semi-annually on the notes issued November 3, 2015 and April 12, 2016, and annually on the notes issued January 24, 2020 and September 9, 2021. The Euro Notes have financial covenants similar to those of the U.S. Dollar Notes.

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 (gains of $40.9 million and $73.6 million for the three and nine months ended September 30, 2021, respectively, as compared to losses of $41.9 million and $52.3 million for the three and nine months ended September 30, 2020 respectively).

Mortgage Notes

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

At September 30, 2021, the related contractual interest rates are fixed, ranging between 3.2% and 7.1%, and mature between January 1, 2022 and July 1, 2030.

At September 30, 2021, approximate principal maturities of our Notes Payable are as follows (amounts in thousands):

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			Unsecured Debt						Mortgage Debt						Total
Remainder of 2021			$	—					$	251					$	251
2022			500,000						2,574						502,574
2023			—						19,219						19,219
2024			815,896						124						816,020
2025			280,484						131						280,615
Thereafter			4,190,752						1,328						4,192,080
			$	5,787,132					$	23,627					$	5,810,759
Weighted average effective rate			1.8%						3.9%						1.8%

Cash paid for interest totaled $49.8 million and $40.2 million for the nine months ended September 30, 2021 and 2020, respectively. Interest capitalized as real estate totaled $2.6 million and $2.5 million for the nine month periods ended September 30, 2021 and 2020, respectively.

At September 30, 2021, the noncontrolling interests represent (i) third-party equity interests in subsidiaries owning 24 operating self-storage facilities and five self-storage facilities that are under construction and (ii) 231,978 partnership units held by third-parties in a subsidiary that are convertible on a one-for-one basis (subject to certain limitations) into common shares of the Company at the option of the unitholder (collectively, the “Noncontrolling Interests”). At September 30, 2021, the Noncontrolling Interests cannot require us to redeem their interests, other than pursuant to a liquidation of the subsidiary.

During the nine months ended September 30, 2021 and 2020, we allocated a total of $4.1 million and $2.8 million, respectively, of income to these interests; and we paid $4.5 million and $4.0 million, respectively, in distributions to these interests.

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Preferred Shares

At September 30, 2021 and December 31, 2020, we had the following series of Cumulative Preferred Shares (“Preferred Shares”) outstanding:

																		At September 30, 2021												At December 31, 2020
Series						Earliest Redemption Date						Dividend Rate						Shares Outstanding						Liquidation Preference						Shares Outstanding						Liquidation Preference
																		(Dollar amounts in thousands)
Series C						5/17/2021						5.125		%				—						$	—					8,000						$	200,000
Series D						7/20/2021						4.950		%				—						—						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						11,400						285,000
Series I						9/12/2024						4.875		%				12,650						316,250						12,650						316,250
Series J						11/15/2024						4.700		%				10,350						258,750						10,350						258,750
Series K						12/20/2024						4.750		%				9,200						230,000						9,200						230,000
Series L						6/17/2025						4.625		%				22,600						565,000						22,600						565,000
Series M						8/14/2025						4.125		%				9,200						230,000						9,200						230,000
Series N						10/6/2025						3.875		%				11,300						282,500						11,300						282,500
Series O						11/17/2025						3.900		%				6,800						170,000						6,800						170,000
Series P						6/16/2026						4.000		%				24,150						603,750						—						—
Series Q						8/17/2026						3.950		%				5,750						143,750						—						—
Total Preferred Shares																		160,600						$	4,015,000					151,700						$	3,792,500

The holders of our Preferred Shares have general preference rights with respect to liquidation, quarterly distributions, and any accumulated unpaid distributions. Except as noted below, holders of the Preferred Shares do not have voting rights. In the event of a cumulative arrearage equal to six quarterly dividends, holders of all outstanding series of preferred shares (voting as a single class without regard to series) will have the right to elect two additional members to serve on our board of trustees (our “Board”) until the arrearage has been cured. At September 30, 2021, there were no dividends in arrears. The affirmative vote of at least 66.67% of the outstanding shares of a series of Preferred Shares is required for any material and adverse amendment to the terms of such series. The affirmative vote of at least 66.67% of the outstanding shares of all of our Preferred Shares, voting as a single class, is required to issue shares ranking senior to our Preferred Shares.

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.

In December 2020, we called for redemption of, and on January 20, 2021, we redeemed our 5.400% Series B Preferred Shares, at par. The liquidation value (at par) of $300.0 million was reclassified as a liability at December 31, 2020, and is not included in the table above. We recorded a $9.9 million allocation of income from our common shareholders to the holders of our Preferred Shares in the year ended December 31, 2020 in connection with this redemption.

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On June 16, 2021, we issued approximately 24.2 million depositary shares, each representing 0.001 of a share of our 4.000% Series P Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $603.8 million in gross proceeds, and we incurred $17.4 million in issuance costs.

On June 30, 2021, we redeemed our 5.125% Series C Preferred Shares, at par. We recorded a $6.4 million allocation of income from our common shareholders to the holders of our Preferred Shares in the nine months ended September 30, 2021 in connection with this redemption.

On July 20, 2021, we redeemed our 4.950% Series D Preferred Shares, at par. We recorded a $10.6 million allocation of income from our common shareholders to the holders of our Preferred Shares in the nine months ended September 30, 2021 in connection with this redemption.

On August 17, 2021, we issued approximately 5.8 million depositary shares, each representing 0.001 of a share of our 3.950% Series Q Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $143.8 million in gross proceeds, and we incurred $4.8 million in issuance costs.

On June 17, 2020, we issued 22.6 million depositary shares, each representing 0.001 of a share of our 4.625% Series L Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $565.0 million in gross proceeds, and we incurred $15.8 million in issuance costs.

On July 10, 2020, we redeemed our 5.375% Series V Preferred Shares, at par. We recorded a $15.1 million allocation of income from our common shareholders to the holders of our Preferred Shares in the nine months ended September 30, 2020 in connection with this redemption.

On August 14, 2020, we issued 9.2 million depositary shares, each representing 0.001 of a share of our 4.125% Series M Preferred Shares, at an issuance price of $25.00 per depositary share, for a total of $230.0 million in gross proceeds, and we incurred $5.4 million in issuance costs.

On September 30, 2020, we redeemed our 5.200% Series W and Series X Preferred Shares, at par. We recorded a $23.3 million allocation of income from our common shareholders to the holders of our Preferred Shares in the three and nine months ended September 30, 2020 in connection with these redemptions.

Dividends

Common share dividends, including amounts paid to our restricted share unitholders, totaled $351.2 million ($2.00 per share) and $349.8 million ($2.00 per share) for the three months ended September 30, 2021 and 2020, respectively, and $1.05 billion ($6.00 per share) for each of the nine months ended September 30, 2021 and 2020, respectively. Preferred share dividends totaled $46.2 million and $53.9 million for the three months ended September 30, 2021 and 2020, respectively, and $138.5 million and $158.8 million for the nine months ended September 30, 2021 and 2020, respectively.

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We consider stock options and RSUs “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, and (iii) the recipient is affected by changes in the market price of our stock.

We amortize the grant-date fair value of awards, as compensation expense over the service period, which begins on the grant date and ends on the expected 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).

We recorded share-based compensation expense associated with stock options and RSUs in the various expense categories in the Statement of Income as set forth in the following table. In addition, $0.8 million and $3.1 million share-based compensation cost was capitalized as real estate facilities for the three and nine months ended September 30, 2021, respectively.

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
			(Amounts in thousands)
Self-storage cost of operations			$	4,506					$	3,488					$	16,272					$	10,550
Ancillary cost of operations			343						—						1,394						—
General and administrative			9,746						5,278						30,019						11,080
Total			$	14,595					$	8,766					$	47,685					$	21,630

In July 2020, we modified our share-based compensation plans to allow immediate vesting upon retirement (“Retirement Acceleration”), and to extend the exercisability of outstanding stock options up to a year after retirement, for currently outstanding and future grants. Prior to the modification, unvested awards were forfeited, and outstanding vested stock options were cancelled, upon retirement. Employees are eligible for Retirement Acceleration if they meet certain conditions including length of service, age, notice of intent to retire, and facilitation of succession for their role.

This modification results in accelerating amortization of compensation expense for each grant by changing the end of the service period from the original vesting date to the date an employee is expected to be eligible for Retirement Acceleration, if earlier. As a result, the Company recorded $4.8 million and $15.8 million in accelerated compensation expense during the three and nine months ended September 30, 2021, respectively, as compared to $2.6 million for each of the three and nine months ended September 30, 2020, respectively.

During the three months ended March 31, 2021, the Company depleted the available shares under the 2016 Equity and Performance-Based Incentive Compensation Plan resulting in $4.8 million of award expense classified as a liability as of March 31, 2021. On April 26, 2021, the Company’s Shareholders approved the 2021 Equity and Performance-Based Incentive Compensation Plan, which authorizes an additional three million shares available for future issuance. Consequently, awards previously classified as a liability were revalued as of April 26, 2021 and reclassified to equity.

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

Stock Options

Stock options vest over 3 to 5 years, expire 10 years after the grant date, and have an exercise price 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 performance-based and non-performance based 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.

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For the three and nine months ended September 30, 2021, we recorded share-based compensation expense for outstanding stock options of $5.5 million and $20.5 million, respectively, as compared to $0.8 million and $3.2 million for the same periods in 2020. The amounts for the three and nine months ended September 30, 2021 includes $0.4 million and $4.9 million, respectively, as compared to $0.1 million for each of the same periods in 2020, in connection with the Retirement Acceleration as discussed above.

During the nine months ended September 30, 2021, 385,000 stock options were awarded, 411,467 options were exercised and 10,000 options were forfeited. In addition, we expect an incremental 175,000 stock options to be paid out based on the estimated achievement of performance targets. A total of 3,099,700 stock options were outstanding at September 30, 2021, (2,961,167 at December 31, 2020) and have an average exercise price of $216.45.

During the nine months ended September 30, 2021, we incurred share-based compensation expense of $1.1 million in connection with the initial 15,000 stock option awards issued to each of the five trustees who joined our Board in January 2021.

During the nine months ended September 30, 2021, 245,000 stock options were awarded where vesting is dependent upon meeting certain performance targets with respect to 2021, 2022, and 2023. These awards contain a relative Total Shareholder Return modifier that will adjust the payout based on relative performance as compared to the market. As of September 30, 2021, these targets are expected to be met at 100% achievement. These options resulted in $5.7 million in related compensation expense during the nine months ended September 30, 2021.

During the nine months ended September 30, 2020, 770,000 stock options were awarded where vesting is dependent upon meeting certain performance targets with respect to 2020, 2021, and 2022. As of September 30, 2021, these targets are expected to be met at 125% achievement, an increase from 100% as of December 31, 2020, resulting in $9.6 million in related compensation expense during the nine months ended September 30, 2021.

Restricted Share Units

RSUs generally vest over 5 to 8 years 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 nine months ended September 30, 2021, 78,040 RSUs were granted, 26,414 RSUs were forfeited and 81,193 RSUs vested. In addition, we expect an incremental 9,250 RSUs to be paid out based on the estimated achievement of performance targets. The vesting resulted in the issuance of 54,914 common shares. In addition, tax deposits totaling $10.4 million ($9.7 million for the same period in 2020) were made on behalf of employees in exchange for 26,279 common shares withheld upon vesting. A total of 532,471 RSUs were outstanding at September 30, 2021 (552,788 at December 31, 2020). During the nine months ended September 30, 2021, 37,000 RSUs were awarded where vesting is dependent upon meeting certain performance targets for 2021. As of September 30, 2021, these targets are expected to be met at 125% achievement. These RSUs resulted in $4.6 million in related compensation expense during the nine months ended September 30, 2021.

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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 operations of our tenant reinsurance, merchandise sales, and third party management activities.

Investment in PSB

This segment represents our approximate 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 and board of directors 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 SEC. The segment presentation in the tables below includes our equity earnings from PSB.

Investment in Shurgard

This segment represents our approximate 35% equity interest in Shurgard, a publicly held company which owns and operates self-storage facilities located in seven countries in Western Europe. Shurgard 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, the CODM reviews Shurgard’s net income. The segment presentation below includes our equity earnings from Shurgard.

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Presentation of Segment Information

The following table reconciles NOI (as applicable) and net income of each segment to our consolidated net income:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
			(amounts in thousands)
Self-Storage Segment
Revenue			$	840,510					$	683,949					$	2,333,850					$	2,022,692
Cost of operations			(216,999)						(209,179)						(631,699)						(637,229)
Net operating income			623,511						474,770						1,702,151						1,385,463
Depreciation and amortization			(188,552)						(138,333)						(508,139)						(411,851)
Net income			434,959						336,437						1,194,012						973,612
Ancillary Segment
Revenue			54,421						50,596						157,658						143,840
Cost of operations			(19,735)						(15,174)						(52,044)						(44,081)
Net operating income			34,686						35,422						105,614						99,759
Investment in PSB Segment (a) - Equity in earnings of unconsolidated entities			27,110						16,548						62,494						51,513
Investment in Shurgard Segment (a) - Equity in earnings of unconsolidated entities			5,750						4,692						18,888						11,350
Total net income allocated to segments			502,505						393,099						1,381,008						1,136,234
Other items not allocated to segments:
General and administrative			(31,682)						(18,262)						(78,996)						(53,234)
Interest and other income			3,356						7,192						9,321						18,976
Interest expense			(23,736)						(14,282)						(60,980)						(42,048)
Foreign currency exchange gain (loss)			40,906						(41,900)						73,584						(52,250)
Gain on sale of real estate			279						—						13,683						1,117
Net income			$	491,628					$	325,847					$	1,337,620					$	1,008,795

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 deductible 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

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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 September 30, 2021, there were approximately 1.1 million certificates held by our self-storage customers, representing aggregate coverage of approximately $4.7 billion.

Commitments

We have construction commitments representing future expected payments for construction under contract totaling $134.1 million at September 30, 2021. We expect to pay approximately $38.3 million in the remainder of 2021, $93.9 million in 2022 and $1.9 million in 2023 for these construction commitments.

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