Exhibit 99.3
The Company accounts for its property acquisitions in accordance with the
provisions of Statement of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS No. 141). Pursuant to SFAS No. 141, the purchase price of a
property is allocated to the property's assets based on management's estimates
of their fair value. These estimates can vary depending on the facts and
circumstances of each acquisition.
SFAS No. 141 provides guidance on allocating the purchase price of a property
among its assets and liabilities and, in particular, to tangible and intangible
assets. The methodology of the Company includes estimating an "as-if vacant"
fair value of the physical property, which is allocated to land, building and
improvements. Factors considered by management in their analysis of the "as-if
vacant" value include lost rentals at market rates during an expected lease-up
period, which the Company has estimated to range from three to fifteen months,
and costs to execute similar leases including incremental tenant improvements,
leasing commissions, legal and other related expenses.
The difference between the purchase price and the "as-if vacant" fair value is
allocated to intangible assets. There are three categories of intangible assets
to be considered, (i) value of in-place leases, (ii) above-/ below-market value
of in-place leases and (iii) customer relationship value.
The value of in-place leases is estimated based on the value associated with the
costs avoided in originating leases comparable to the acquired in-place leases
as well as the value associated with lost rental revenue during the assumed
lease-up period. The value of in-place leases is amortized as real estate
amortization over the estimated weighted-average remaining lease lives. The
Company generally uses a weighted average life of seven-years for this purpose.
Amortization of in-place lease intangibles is an "add-back" to net income for
the purpose of calculating funds from operations ("FFO").
Above-market and below-market in-place lease values for acquired properties are
recorded based on the present value (using a discount rate that reflects the
risks associated with the property acquired and the respective tenants) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimates of fair market lease rates for
the comparable in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease. The value of above-market lease values is
amortized as a reduction of rental income over the remaining terms of the
respective leases. The value of below-market lease values is amortized as an
increase to rental income over the remaining terms of the respective leases.
The Company has determined that no value should be allocated to customer
relationship intangibles in connection with recent acquisitions as the Company
has pre-existing business relationships with substantially all of the major
retailers in the properties acquired and the customer relationships associated
with the properties acquired provide no incremental value over such existing
relationships.
The following is a summary of the Company's intangible assets as of December 31,
2003. The goodwill balance was recorded in connection with the acquisition of
PREIT-RUBIN, Inc., in 1997. Pursuant to accounting principles generally accepted
in the United States of America, goodwill is not amortized, and is reviewed for
possible impairment on at least an annual basis.
Real Estate Real Estate
Held for Held for Sale
(000's omitted) Investment (1) Total
-------- ------- --------
Value of In-Place Lease Intangibles $158,631 (2) $34,901 $193,532
Above-Market Lease Intangibles 13,872 (3) 869 14,741
-------- ------- --------
Sub-total 172,503 35,770 208,273
Goodwill 9,041 - 9,041
-------- ------- --------
Total Intangible assets $181,544 (4) $35,770 $217,314
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Below-Market Lease Intangible $(12,009)(5) $ (911) $(12,920)
======== ======= ========
(1) Represents six properties acquired in connection with the merger with Crown
American Realty Trust ("Crown") that have been classified as held for sale
as of December 31, 2003.
(2) Includes $115.5 million related to properties acquired in connection with
the Crown merger, $26.2 million related to properties acquired in connection
with the acquisitions from The Rouse Company and $16.9 million related to
other acquisitions. Value of in-place lease intangibles is amortized over a
seven year life that approximates the weighted average remaining terms of
the leases in place at the acquisition date, and is reflected in
depreciation and amortization expense in the Company's consolidated
statement of income. Amortization of in-place lease intangibles is an
"add-back" to net income for the purpose of calculating funds from
operations ("FFO").
(3) Includes $8.0 million related to properties acquired in connection with the
Crown merger, $5.0 million related to properties acquired in connection with
the acquisitions from The Rouse Company and $0.9 million related to other
acquisitions. The combined amount related to Crown from footnotes 2 and 3 of
$123.5 million was incorrectly stated as $110 million in the text of the
Company's press release on February 25, 2004. Above-market lease intangibles
are amortized over the remaining terms of the leases, and are reflected as a
reduction of base rent in the Company's consolidated statement of income.
(4) Due to the incorrect amount described in footnote 3 above, this amount was
incorrectly stated as $168 million in the text of the Company's press
release on February 25, 2004. None of the other financial information in the
February 25, 2004 press release was affected by these incorrect amounts.
(5) Includes $7.3 million related to properties acquired in connection with the
Crown merger, $3.8 million related to properties acquired in connection with
the acquisitions from the Rouse Company and $0.9 million related to other
acquisitions. Below-market lease intangibles are amortized over the
remaining terms of the leases, and are reflected as an increase to base rent
in the Company's consolidated statement of income.
The following table summarizes the Company's depreciation and amortization
expense for the quarter ended December 31, 2003 and year ended December 31,
2003.
(000's omitted) Quarter Ended December 31, 2003 Year Ended December 31, 2003
Wholly-Owned Joint Venture Wholly-Owned Joint
(1) (3) Total (2) Venture (3) Total
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Depreciation $11,711 $ 910 $12,621 $29,632 $4,020 $33,652
Amortization of intangible
assets 5,971 - 5,971 9,432 - 9,432
Amortization of leasing
expenses 170 333 503 601 1,051 1,652
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Total real estate depreciation
and amortization 17,852 1,243 19,095 39,665 5,071 44,736
Non-real estate depreciation 65 - 65 260 - 260
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Total depreciation and
amortization $17,917 $1,243 $19,160 $39,925 $5,071 $44,996
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(1) Reflects consolidated depreciation and amortization expense.
(2) This amount includes $2,309 depreciation and amortization expense related to
the multifamily properties that was recorded before their classification as
discontinued operations. Consolidated depreciation and amortization expense
for the year ended December 31, 2003 was $37,616.
(3) Reflects depreciation and amortization expense for unconsolidated entities.
For financial reporting purposes, this amount is a component of equity in
income of partnerships and joint ventures.