5. Investment in Unconsolidated Entities

Real Estate Joint Ventures and Investments

Joint ventures are common in the real estate industry. We use joint ventures to finance properties, develop new properties and diversify our risk in a particular property or portfolio of properties. We held joint venture ownership interests in 74 properties in the United States as of September 30, 2013 and 78 properties as of December 31, 2012. We held interests in nine joint venture properties in Japan as of September 30, 2013 and eight joint venture properties as of December 31, 2012. We held interests in three joint venture properties in South Korea as of September 30, 2013 and two as of December 31, 2012. At September 30, 2013 and December 31, 2012, we also held interests in one joint venture property in Mexico and one joint venture property in Malaysia. On August 1, 2013, our first joint venture property in Canada opened. We account for these joint venture properties using the equity method of accounting. As discussed below, on January 9, 2012, we sold our interest in Gallerie Commerciali Italia, S.p.A,, or GCI, which at the time owned 45 properties located in Italy. On March 14, 2012, we purchased a 28.7% equity stake in Klépierre. On May 21, 2012, Klépierre paid a dividend, which we elected to receive in additional shares, resulting in an increase in our ownership to approximately 28.9%.

Certain of our joint venture properties are subject to various rights of first refusal, buy-sell provisions, put and call rights, or other sale or marketing rights for partners which are customary in real estate joint venture agreements and the industry. We and our partners in these joint ventures may initiate these provisions (subject to any applicable lock up or similar restrictions), which may result in either the sale of our interest or the use of available cash or borrowings, or the use of limited partnership interests in the Operating Partnership, to acquire the joint venture interest from our partner.

We may provide financing to joint ventures primarily in the form of interest bearing construction loans. As of September 30, 2013 and December 31, 2012, we had construction loans and other advances to related parties totaling $103.6 million and $25.4 million, respectively, which are included in deferred costs and other assets.

Unconsolidated Property Transactions

On December 31, 2012, we formed a joint venture with Institutional Mall Investors, or IMI, to own and operate The Shops at Mission Viejo in the Los Angeles suburb of Mission Viejo, California, and Woodfield Mall in the Chicago suburb of Schaumburg, Illinois. We and IMI each own a noncontrolling 50% interest in Woodfield Mall and we own a noncontrolling 51% interest in The Shops at Mission Viejo and IMI owns the remaining 49%. Prior to the formation of the joint venture, we owned 100% of The Shops at Mission Viejo and IMI owned 100% of Woodfield Mall. No gain was recorded as the transaction was recorded based on the carryover basis of our previous investment. Woodfield Mall is encumbered by a $425 million mortgage loan which matures in March of 2024 and bears interest at 4.5%. In January 2013, the joint venture closed a $295 million mortgage on the Shops at Mission Viejo which bears interest at 3.61% and matures in February of 2023. The proceeds from the financing were distributed to the venture partners and, as a result, we received a distribution of $149.7 million.

On March 22, 2012, we acquired, through an acquisition of substantially all of the assets of The Mills Limited Partnership, or TMLP, additional interests in 26 properties, or the Mills transaction. The transaction resulted in additional interests in 16 of the properties which remain unconsolidated, the consolidation of nine previously unconsolidated properties and the purchase of the remaining noncontrolling interest in a previously consolidated property. The transaction was valued at $1.5 billion, which included repayment of the remaining $562.1 million balance on TMLP's senior loan facility, and retirement of $100.0 million of TMLP's trust preferred securities. In connection with the transaction, our $558.4 million loan to SPG-FCM Ventures, LLC, or SPG-FCM, was extinguished on a non-cash basis. We consolidated $2.6 billion in additional property-level mortgage debt in connection with this transaction. This property-level mortgage debt was previously presented as debt of our unconsolidated entities. We and our joint venture partner had equal ownership in these properties prior to the transaction.

The consolidation of the previously unconsolidated properties resulted in a remeasurement of our previously held interests in these nine newly consolidated properties to fair value and recognition of a corresponding non-cash gain of $488.7 million. In addition, we recorded an other-than-temporary impairment charge of $22.4 million for the excess of carrying value of our remaining investment in SPG-FCM over its estimated fair value. The gain on the transaction and impairment charge are included in gain (loss) upon acquisition of controlling interests, sale or disposal of assets and interests in unconsolidated entities, and impairment charge on investment in unconsolidated entities, net, in the accompanying consolidated statements of operations and comprehensive income. The assets and liabilities of the newly consolidated properties acquired in the Mills transaction have been reflected at their estimated fair value at the acquisition date.

We recorded our acquisition of the interests in the nine newly consolidated properties using the acquisition method of accounting. Tangible and intangible assets and liabilities were established based on their fair values at the date of acquisition. The results of operations of the newly consolidated properties have been included in our consolidated results from the date of acquisition. The purchase price allocations were finalized during the first quarter of 2013. No significant adjustments were made to the previously reported purchase price allocations.

On January 6, 2012, we paid $50.0 million to acquire an additional interest in Del Amo Fashion Center, increasing our interest in the property to 50%.

European Investments

At September 30, 2013, we owned 57,634,148 shares, or approximately 28.9%, of Klépierre, which had a quoted market price of $43.25 per share. At the date of purchase on March 14, 2012, our excess investment in Klépierre was approximately $1.2 billion which we have allocated to the underlying investment property, other assets and liabilities based on estimated fair value. Our share of net income, net of amortization of our excess investment, was $23.8 million for the nine months ended September 30, 2013. Based on applicable Euro:USD exchange rates and after our conversion of Klépierre's results to GAAP, Klépierre's total revenues, operating income and consolidated net income were approximately $1.1 billion, $538.6 million and $231.5 million, respectively, for the nine months ended September 30, 2013. Our share of net income, net of the amortization of our excess investment, was $4.7 million from the acquisition date through September 30, 2012.

During the second quarter of 2013, we signed a definitive agreement to form one or more joint ventures to invest in certain existing designer outlets, development projects, and the property management and development companies of McArthurGlen, an owner, developer and manager of designer outlets in Europe. As of September 30, 2013, we had made equity investments and advances and funded our share of development costs of approximately $73.9 million, which included the acquisition of a noncontrolling 50% ownership interest in the property management and development companies, a 45% ownership interest in a development project, and a 22.5% interest in Ashford Designer Outlets in Kent, UK. On October 16, 2013, we completed the transactions contemplated by our previously announced definitive agreement by acquiring interests in four existing McArthurGlen outlets — Parndorf (Vienna, Austria), La Reggia (Naples, Italy), Noventa di Piave (Venice, Italy) and Roermond (Roermond, the Netherlands) for cash consideration of €327.5 million ($444.1 million USD equivalent). Our noncontrolling ownership interests in these four centers range from 60% to 90%.

We also have a minority interest in Value Retail PLC, which owns and operates nine luxury outlets throughout Europe and a direct minority ownership in three of those outlets. These investments are accounted for under the cost method. At September 30, 2013 and December 31, 2012, the carrying value of these investments was $115.4 and $95.5 million, respectively, and is included in deferred costs and other assets.

On January 9, 2012, we sold our entire ownership interest in GCI to our venture partner, Auchan S.A. The aggregate cash we received was $375.8 million, and we recognized a gain on the sale of $28.8 million. Our investment carrying value included $39.5 million of accumulated losses related to currency translation and net investment hedge accumulated balances, which had been recorded in accumulated other comprehensive income (loss).

Asian Joint Ventures

We conduct our international Premium Outlet operations in Japan through a joint venture with Mitsubishi Estate Co., Ltd. We have a 40% ownership interest in this joint venture. The carrying amount of our investment in this joint venture was $276.2 million and $314.2 million as of September 30, 2013 and December 31, 2012, respectively, including all related components of accumulated other comprehensive income (loss). We conduct our international Premium Outlet operations in South Korea through a joint venture with Shinsegae International Co. We have a 50% ownership interest in this joint venture. The carrying amount of our investment in this joint venture was $70.7 million and $62.9 million as of September 30, 2013 and December 31, 2012, respectively; including all related components of accumulated other comprehensive income (loss).

Summary Financial Information

A summary of our equity method investments and share of income from such investments, excluding Klépierre, follows. We acquired additional controlling interests in nine properties in the Mills transaction on March 22, 2012. These previously unconsolidated properties became consolidated properties as of their acquisition date. During 2012, we disposed of our joint venture interests in one mall and three retail properties. The results of operations of the properties for all of these 2012 transactions are classified as gain (loss) from operations of discontinued joint venture interests in the accompanying joint venture statements of operations. In 2013, we disposed of two retail properties. The gain on disposal is reported in gain (loss) on disposal of discontinued operations, net in the accompanying joint venture statements of operations. Balance sheet information for these investments is as follows:

	September 30, 2013		December 31, 2012

BALANCE SHEETS
Assets:
Investment properties, at cost	$	14,828,264	$	14,607,291
Less — accumulated depreciation		5,144,189		4,926,511

		9,684,075		9,680,780
Cash and cash equivalents		653,185		619,546
Tenant receivables and accrued revenue, net		270,770		252,774
Investment in unconsolidated entities, at equity		38,669		39,589
Deferred costs and other assets		442,831		438,399

Total assets	$	11,089,530	$	11,031,088

Liabilities and Partners' Deficit:
Mortgages	$	11,979,021	$	11,584,863
Accounts payable, accrued expenses, intangibles, and deferred revenue		723,143		672,483
Other liabilities		394,461		447,132

Total liabilities		13,096,625		12,704,478
Preferred units		67,450		67,450
Partners' deficit		(2,074,545)		(1,740,840)

Total liabilities and partners' deficit	$	11,089,530	$	11,031,088

Our Share of:
Partners' deficit	$	(943,037)	$	(799,911)
Add: Excess Investment		2,092,875		2,184,133

Our net Investment in unconsolidated entities, at equity	$	1,149,838	$	1,384,222

"Excess Investment" represents the unamortized difference of our investment over our share of the equity in the underlying net assets of the joint ventures or other investments acquired and is allocated on a fair value basis primarily to investment property, lease related intangibles, and debt premiums and discounts. We amortize excess investment over the life of the related depreciable components of investment property, typically no greater than 40 years, the terms of the applicable leases and the applicable debt maturity, respectively. The amortization is included in the reported amount of income from unconsolidated entities.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

	*2013*		*2012*		*2013*		*2012*
STATEMENT OF OPERATIONS
Revenue:
Minimum rent	$	408,204	$	370,183	$	1,201,748	$	1,091,701
Overage rent		40,784		44,002		128,565		128,622
Tenant reimbursements		197,494		176,544		569,044		508,698
Other income		40,903		34,754		122,505		121,686

Total revenue		687,385		625,483		2,021,862		1,850,707
Operating Expenses:
Property operating		125,329		125,162		364,494		351,963
Depreciation and amortization		135,457		125,828		389,843		375,280
Real estate taxes		55,374		45,068		160,152		132,618
Repairs and maintenance		15,653		15,418		48,156		45,269
Advertising and promotion		14,141		11,706		44,164		39,600
Provision for (recovery of) credit losses		192		(646)		1,772		(247)
Other		37,948		36,089		110,129		128,134

Total operating expenses		384,094		358,625		1,118,710		1,072,617

Operating Income		303,291		266,858		903,152		778,090
Interest expense		(151,579)		(148,891)		(453,573)		(451,581)

Income from Continuing Operations		151,712		117,967		449,579		326,509
Gain (loss) from operations of discontinued joint venture interests		7		(1,978)		(339)		(20,769)
Gain (loss) on disposal of discontinued operations, net		6,580		(4,904)		24,936		(4,904)

Net Income	$	158,299	$	111,085	$	474,176	$	300,836

Third-party investors' share of net income	$	85,211	$	66,308	$	263,926	$	163,108

Our share of net income		73,088		44,777		210,250		137,728
Amortization of excess investment		(25,733)		(21,726)		(75,415)		(55,059)
Our share of loss on sale or disposal of assets and interests in unconsolidated entities, net		—		9,245		—		9,245

Income from unconsolidated entities	$	47,355	$	32,296	$	134,835	$	91,914

Our share of income from unconsolidated entities in the above table, aggregated with our share of the results of Klépierre, is presented in income from unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income.