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 78 properties as of March 31, 2017.

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 March 31, 2017 and December 31, 2016, we had construction loans and other advances to related parties totaling $33.6 million and $12.3 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Entity Transactions

On September 15, 2016, we and our partners, through two separate joint ventures, acquired certain assets and liabilities of Aéropostale, a retailer of apparel and accessories, out of bankruptcy. Our noncontrolling interest in the retail operations venture and in the licensing venture is 49.05% and 28.45%, respectively. Our aggregate initial investment in the ventures was $33.1 million, which included our share of working capital funded into the retail business. We eliminate our share of rents and other tenant charges on leasing activities with this venture.

On April 14, 2016, we and a joint venture partner completed the acquisition of The Shops at Crystals, a luxury shopping center on the Las Vegas Strip, for $1.1 billion. The transaction was funded with a combination of cash on hand, cash from our partner, and a $550.0 million 3.74% fixed-rate mortgage financing that will mature on July 1, 2026. We have a 50% noncontrolling interest in this joint venture and manage the day-to-day operations. Substantially all of our investment has been determined to relate to investment property based on estimated fair values at the acquisition date.

As of March 31, 2017, we had a 10.8% noncontrolling equity interest in HBS, a venture formed with Hudson’s Bay Company. The venture has 42 properties in the U.S. and, subsequent to formation, acquired 41 properties from Germany’s leading department store, Kaufhof. In exchange for our interest, we committed to contribute $100.0 million for improvements to certain properties. As of March 31, 2017, we had funded $45.4 million of this commitment. In addition, we contributed $178.5 million in connection with the acquisition of the Kaufhof department stores. Our share of net income, net of amortization of our excess investment, was $3.2 million and $1.1 million for the three months ended March 31, 2017 and 2016, respectively. Total revenues, operating income and consolidated net income were approximately $103.7 million, $80.1 million, and $52.7 million, respectively, for the three months ended March 31, 2017 and $89.0 million, $37.3 million, and $12.2 million, respectively, for the three months ended March 31, 2016.

European Investments

At March 31, 2017, we owned 63,924,148 shares, or approximately 20.5%, of Klépierre, which had a quoted market price of $38.96 per share. Our share of net income (loss), net of amortization of our excess investment, was $7.1 million and $13.0 million for the three months ended March 31, 2017 and 2016, 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 $342.6 million, $105.0 million and $69.5 million, respectively, for the three months ended March 31, 2017 and $342.7 million, $98.8 million and $44.2 million, respectively, for the three months ended March 31, 2016.

We had an interest in a European investee that had interests in seven Designer Outlet properties as of March 31, 2017 and December 31, 2016. On January 1, 2016, we gained control of the entity through terms of the underlying venture agreement requiring a remeasurement of our previously held equity interest to fair value resulting in a non-cash gain of $12.1 million in earnings during the first quarter of 2016, including amounts reclassified from accumulated other comprehensive income (loss) related to the currency translation adjustment previously recorded on our investment. The gain is included in gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income. As a result of the change in control, we consolidated two of the outlet properties on January 1, 2016. The consolidation required us to recognize the entity's identifiable assets and liabilities at fair value in our consolidated financial statements along with the related redeemable noncontrolling interest representing our partners' share. The fair value of the consolidated assets and liabilities relates primarily to investment property, investments in unconsolidated entities and assumed mortgage debt. Due to certain redemption rights held by our venture partner, the noncontrolling interest is presented (i) in the accompanying Simon consolidated balance sheet outside of equity in limited partners’ preferred interest in the Operating Partnership and noncontrolling redeemable interests in properties and (ii) in the accompanying Operating Partnership consolidated balance sheet within preferred units, various series, at liquidation value, and noncontrolling redeemable interests in properties.

On July 25, 2016, this European investee also acquired the remaining 33% interest in two Italian outlet centers in Naples and Venice, as well as the remaining interests in related expansion projects and working capital for cash consideration of €145.5 million. This resulted in the consolidation of these two properties on the acquisition date, requiring a remeasurement of our previously held equity interest to fair value and the recognition of a non-cash gain of $29.3 million in earnings during the third quarter of 2016. The determination of fair value of the consolidated assets and liabilities consists primarily of investment property and lease related intangibles. As of March 31, 2017, our legal percentage ownership interests in these properties ranged from 45% to 90%.

On April 7, 2017, this European investee acquired an additional 15.7% investment in the Roermond Designer Outlets Phase 4 expansion for cash consideration of approximately $17.8 million, bringing its total noncontrolling interest in the expansion to 51.3%.

On April 21, 2017, this European investee acquired a 100% interest in an outlet center in Roosendaal, Netherlands for cash consideration of $69.8 million and the assumption of existing mortgage debt of $40.1 million.

In addition, we have a noncontrolling interest in a European property management and development company that provides services to the Designer Outlet properties.

We also have minority interests in Value Retail PLC and affiliated entities, which own or have interests in and operate nine luxury outlets located throughout Europe and we have a direct minority ownership in three of those outlets. Our investment in these entities is accounted for under the cost method. At both March 31, 2017 and December 31, 2016, the carrying value of these non-marketable investments was $140.8 million and is included in deferred costs and other assets.

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% noncontrolling ownership interest in this joint venture. The carrying amount of our investment in this joint venture was $239.0 million and $227.5 million as of March 31, 2017 and December 31, 2016, 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% noncontrolling ownership interest in this joint venture. The carrying amount of our investment in this joint venture was $136.4 million and $130.9 million as of March 31, 2017 and December 31, 2016, 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, our investment in Aéropostale, and HBS, follows.

COMBINED BALANCE SHEETS


	March 31,		December 31,
	2017		2016
Assets:
Investment properties, at cost	$	17,851,775	$	17,549,078
Less - accumulated depreciation		6,034,375		5,892,960
		11,817,400		11,656,118
Cash and cash equivalents		758,716		778,455
Tenant receivables and accrued revenue, net		337,507		348,139
Deferred costs and other assets		368,558		351,098
Total assets	$	13,282,181	$	13,133,810
Liabilities and Partners’ Deficit:
Mortgages	$	14,290,665	$	14,237,576
Accounts payable, accrued expenses, intangibles, and deferred revenue		834,650		867,003
Other liabilities		352,123		325,078
Total liabilities		15,477,438		15,429,657
Preferred units		67,450		67,450
Partners’ deficit		(2,262,707)		(2,363,297)
Total liabilities and partners’ deficit	$	13,282,181	$	13,133,810
Our Share of:
Partners’ deficit	$	(990,000)	$	(1,018,755)
Add: Excess Investment		1,777,705		1,791,691
Our net Investment in unconsolidated entities, at equity	$	787,705	$	772,936

“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 properties, lease related intangibles, and debt premiums and discounts. We amortize excess investment over the life of the related depreciable components of investment properties, 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.

COMBINED STATEMENTS OF OPERATIONS


	For The Three
	Months Ended
	March 31,
	2017		2016
REVENUE:
Minimum rent	$	451,055	$	438,847
Overage rent		51,369		49,624
Tenant reimbursements		215,780		210,941
Other income		64,327		58,680
Total revenue		782,531		758,092
OPERATING EXPENSES:
Property operating		132,985		131,081
Depreciation and amortization		153,455		131,480
Real estate taxes		66,583		61,509
Repairs and maintenance		20,230		19,754
Advertising and promotion		22,198		22,529
Provision for credit losses		3,777		2,690
Other		43,355		45,053
Total operating expenses		442,583		414,096
Operating Income		339,948		343,996
Interest expense		(142,204)		(143,758)
Gain on sale or disposal of assets and interests in unconsolidated entities, net		—		54,473
Net Income	$	197,744	$	254,711
Third-Party Investors’ Share of Net Income	$	99,686	$	118,809
Our Share of Net Income		98,058		135,902
Amortization of Excess Investment		(22,457)		(23,213)
Our Share of Gain on Sale or Disposal of Assets and Interests Included in Other Income in the Consolidated Financial Statements		—		(36,153)
Income from Unconsolidated Entities	$	75,601	$	76,536

Our share of income from unconsolidated entities in the above table, aggregated with our share of the results of Klépierre, our investment in Aéropostale, and HBS, is presented in income from unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income. Unless otherwise noted, our share of the gain on sale or disposal of assets and interests in unconsolidated entities, net is reflected within gain upon acquisition of controlling interests, sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income.