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. As discussed in Note 2, we held joint venture interests in 80 properties as of June 30, 2015.

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 June 30, 2015 and December 31, 2014, we had construction loans and other advances to related parties totaling $14.6 million and $14.9 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Property Transactions

On January 30, 2014, as discussed in Note 9, we acquired the remaining 50% interest in Arizona Mills from our joint venture partner. The consolidation of this previously unconsolidated property resulted in a remeasurement of our previously held interest to fair value and a corresponding non-cash gain of $2.7 million in the first quarter of 2014. As a result of this acquisition, we now own 100% of this property.

On February 24, 2015, Houston Galleria, in which we own a 50.4% noncontrolling interest, refinanced its $821.0 million mortgage with a $1.2 billion mortgage that matures on March 1, 2025. The fixed interest rate was reduced from 5.44% to 3.55% as a result. Excess proceeds from the financing were distributed to the venture partners in February 2015.

On April 13, 2015, we announced we had formed a joint venture with Sears Holdings, or Sears, whereby Sears contributed 10 of its properties located at our malls to the newly formed joint venture in exchange for a 50% noncontrolling interest in this joint venture. We contributed $114.0 million in cash in exchange for a 50% noncontrolling interest in this joint venture. Sears or its affiliates are leasing back each of the 10 properties from the joint venture. The joint venture has the right to recapture not less than 50% of the space leased to Sears to be used for purposes of redeveloping and releasing the recaptured space. We will provide development, leasing and management services to the joint venture. On July 7, 2015, we separately invested approximately $33.0 million in exchange for 1,125,760 common shares of Seritage Growth Properties, a public REIT recently formed by Sears, which now holds their previous interest in the newly formed joint venture.

On April 23, 2015, we announced a partnership with Swire Properties Inc. and Whitman Family Development to jointly develop the approximately 500,000 square foot shopping center component of Brickell City Centre, a mixed-use development in downtown Miami. We own a 25% interest in the retail component of this project which is scheduled to open in September 2016. Our share of the estimated cost of this project including development fees is approximately $100.0 million.

On July 22, 2015, we closed on our previously announced joint venture with Hudson's Bay Company, or HBC, whereby HBC contributed 42 properties and we committed to contribute $100.0 million for improvements to the properties contributed by HBC in exchange for a noncontrolling interest in the newly formed joint venture. We may contribute up to an additional $178.5 million in the newly formed joint venture. Upon the closing of the joint venture, we funded $1.0 million of our commitment. On June 15, 2015 HBC announced it is acquiring Galeria Holding, the parent company of Germany's leading department store, Kaufhof. This joint venture has agreed to purchase at least 40 Kaufhof properties from HBC. This transaction is expected to close in 2015.

European Investments

At June 30, 2015, we owned 63,924,148 shares, or approximately 20.3%, of Klépierre, which had a quoted market price of $44.29 per share. On July 29, 2014 Klépierre announced that it had entered into a conditional agreement to acquire Corio N.V., or Corio, pursuant to which Corio shareholders received 1.14 Klépierre ordinary shares for each Corio ordinary share. On January 15, 2015 the tender offer transaction closed and the merger was completed on March 31, 2015, reducing our ownership from 28.9% at December 31, 2014 to 18.3%. On May 11, 2015 we purchased 6,290,000 additional shares of Klépierre for $279.4 million bringing our ownership to 20.3%. All of the excess investment related to the purchase has been allocated to investment property. Our share of net income, net of amortization of our excess investment, was $9.6 million and $135.9 million for the six months ended June 30, 2015 and 2014, respectively. 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 $740.3 million, $277.6 million and $96.9 million, respectively, for the six months ended June 30, 2015 and $654.8 million, $281.1 million and $1.2 billion, respectively, for the six months ended June 30, 2014. On April 16, 2014, Klépierre completed the disposal of a portfolio of 126 retail galleries located in France, Spain and Italy. Total gross consideration for the transaction, including transfer duties, was €1.98 billion (€1.65 billion Klépierre's group share). The net cash proceeds were used by Klépierre to reduce its overall indebtedness. In connection with this transaction, we recorded a gain of $133.9 million, net of the write-off of a portion of our excess investment, which is included in "Gain upon acquisition of controlling interests and sale or disposal of assets and interest in unconsolidated entities, net" in the accompanying consolidated statements of operations and comprehensive income.

Our joint venture in Europe has interests in five outlet properties, one development project as well as a property management and development company. As of June 30, 2015 our legal percentage ownership interests in these entities range from 45% to 90%. The carrying amount of our investment in these joint ventures, including all related components of accumulated other comprehensive income (loss) as well as subsequent capital contributions for development, was $605.8 million and $677.1 million as of June 30, 2015 and December 31, 2014, respectively. In December 2014, Roermond Designer Outlet phases 2 and 3, in which we own a 90% interest, refinanced its $85.1 million mortgage maturing in 2017 with a $218.9 million mortgage that matures in 2021. The fixed interest rate was reduced from 5.12% to 1.86% as a result. Excess proceeds from the financing were distributed to the venture partners in January 2015.

We also have a minority interests in Value Retail PLC and affiliated entities, which own or have interests in and operate nine luxury outlets throughout Europe and a direct minority ownership in three of those outlets. Our investment in these centers is accounted for under the cost method. At each of June 30, 2015 and December 31, 2014, the carrying value of these non-marketable investments was $115.4 million and is included in deferred costs and other assets.

On March 19, 2015 we disposed of our interest in a joint venture which had held interests in rights to pre-development projects in Europe, for total proceeds of $19.0 million. We recognized a gain on the sale of $8.3 million, which is included in other income in the accompanying consolidated statements of operations and comprehensive income. The gain includes $0.8 million that was reclassified from 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 $229.8 million as of June 30, 2015 and December 31, 2014, 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 $110.4 million and $104.5 million as of June 30, 2015 and December 31, 2014, 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. As discussed in Note 3, on May 28, 2014, we completed the spin-off of Washington Prime, which included ten unconsolidated properties. The net income of these ten properties is included in income from operations of discontinued joint venture interests in the accompanying summary financial information for the six months ended June 30, 2014.

BALANCE SHEETS

	June 30, 2015			December 31, 2014
Assets:
Investment properties, at cost	$	16,790,264		$	16,087,282
Less — accumulated depreciation		5,611,016			5,457,899

		11,179,248			10,629,383
Cash and cash equivalents		885,430			993,178
Tenant receivables and accrued revenue, net		333,033			362,201
Investment in unconsolidated entities, at equity		—			11,386
Deferred costs and other assets		533,447			536,600

Total assets	$	12,931,158		$	12,532,748


Liabilities and Partners' Deficit:
Mortgages	$	13,801,561		$	13,272,557
Accounts payable, accrued expenses, intangibles, and deferred revenue		940,309			1,015,334
Other liabilities		386,277			493,718

Total liabilities		15,128,147			14,781,609
Preferred units		67,450			67,450
Partners' deficit		(2,264,439	)		(2,316,311	)

Total liabilities and partners' deficit	$	12,931,158		$	12,532,748


Our Share of:
Partners' deficit	$	(820,782	)	$	(663,700	)
Add: Excess Investment		1,830,093			1,875,337

Our net Investment in unconsolidated entities, at equity	$	1,009,311		$	1,211,637

"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.

STATEMENT OF OPERATIONS

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
Revenue:
Minimum rent	$	443,485		$	427,899		$	877,266		$	852,684
Overage rent		41,342			41,589			92,522			90,386
Tenant reimbursements		199,142			193,006			393,629			385,799
Other income		61,545			61,929			115,539			174,635

Total revenue		745,514			724,423			1,478,956			1,503,504
Operating Expenses:
Property operating		132,257			131,643			263,061			293,064
Depreciation and amortization		148,607			142,047			290,265			294,195
Real estate taxes		56,477			52,797			115,051			107,588
Repairs and maintenance		17,086			15,944			37,447			35,585
Advertising and promotion		17,388			17,113			34,090			35,923
Provision for credit losses		1,296			970			3,149			4,078
Other		38,924			44,554			83,351			97,483

Total operating expenses		412,035			405,068			826,414			867,916

Operating Income		333,479			319,355			652,542			635,588
Interest expense		(149,041	)		(150,059	)		(296,062	)		(301,696	)

Income from Continuing Operations		184,438			169,296			356,480			333,892
Income from operations of discontinued joint venture interests		—			2,094			—			5,079
Gain on sale or disposal of assets and interests in unconsolidated entities		35,779			—			35,779			—

Net Income	$	220,217		$	171,390		$	392,259		$	338,971


Third-Party Investors' Share of Net Income	$	112,763		$	88,217		$	201,877		$	177,530


Our Share of Net Income		107,454			83,173			190,382			161,441
Amortization of Excess Investment		(24,387	)		(24,383	)		(48,541	)		(49,981	)
Our Share of Loss from Unconsolidated Discontinued Operations		—			(307	)		—			(652	)
Our Share of Gain on Sale or Disposal of Assets and Interests in Unconsolidated Entities, net		(16,339	)		—			(16,339	)		—

Income from Unconsolidated Entities	$	66,728		$	58,483		$	125,502		$	110,808

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.