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 82 properties as of June 30, 2018.

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, 2018 and December 31, 2017, we had construction loans and other advances to related parties totaling $87.4 million and $87.0 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Entity Transactions

On June 7, 2018, Aventura Mall, a property in which we own a 33.3% interest, refinanced its $1.2 billion mortgage and its $200.8 million construction loan with a $1.75 billion mortgage at a fixed interest rate of 4.12% that matures on July 1, 2028. An early repayment charge of $30.9 million was incurred at the property, which along with the write-off of deferred debt issuance costs of $6.5 million, is included in interest expense in the accompanying combined joint venture statements of operations. Our $12.5 million share of the charge associated with the repayment is included in income from unconsolidated entities in the accompanying consolidated statements of operations and comprehensive income. Excess proceeds from the financing were distributed to the venture partners in June 2018.

In May 2017, Colorado Mills, a property in which we have a 37.5% interest, sustained significant hail damage. During the second quarter of 2017, the property recorded an impairment charge of approximately $32.5 million based on the net carrying value of the assets damaged, which was fully offset by anticipated insurance recoveries. As of June 30, 2018, the property had received business interruption proceeds and also property damage proceeds of $58.3 million, which resulted in the property recording a $25.8 million gain in 2018. Our share of the gain, $9.7 million, is reflected within the gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the accompanying consolidated statements of operations and comprehensive income.

On September 15, 2016, we and a group of co-investors acquired certain assets and liabilities of Aéropostale, a retailer of apparel and accessories, out of bankruptcy. The interests were acquired through two separate joint ventures, a licensing venture and an operating venture. In April 2018, we contributed our entire interest in the licensing venture in exchange for additional interests in ABG, a brand development, marketing, and entertainment company. As a result, we recognized a $35.6 million non-cash gain representing the increase in value of our previously held interest in the licensing venture, which is included in other income in the accompanying consolidated statements of operations and comprehensive income. At June 30, 2018, our noncontrolling equity method interests in the operations venture of Aéropostale and in ABG were 44.95% and 5.78%, respectively.

As of June 30, 2018 and December 31, 2017, we had an 11.7% 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 Kaufhof. In exchange for our interest, we committed to contribute $100.0 million for improvements to certain properties. As of June 30, 2018 and December 31, 2017, we had funded $68.3 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 $3.7 million and $3.3 million for the three months ended June 30, 2018 and 2017, respectively, and $7.6 million and $6.5 million for the six months ended June 30, 2018 and 2017, respectively. Total revenues, operating income and consolidated net income were approximately $174.2 million, $102.3 million and $53.8 million, respectively, for the six months ended June 30, 2018 and $183.0 million, $177.9 million and $129.7 million, respectively, for the six months ended June 30, 2017.

European Investments

At June 30, 2018, we owned 63,924,148 shares, or approximately 21.1%, of Klépierre, which had a quoted market price of $37.86 per share. Our share of net income, net of amortization of our excess investment, was $24.8 million and $15.9 million for the three months ended June 30, 2018 and 2017, respectively, and $47.7 million and $23.1 million for the six months ended June 30, 2018 and 2017, 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 $814.7 million, $333.3 million and $364.4 million, respectively, for the six months ended June 30, 2018 and $713.2 million, $251.6 million and $209.7 million, respectively, for the six months ended June 30, 2017.

During the six months ended June 30, 2018, Klépierre completed the disposal of its interests in certain shopping centers. In connection with these disposals, we recorded a gain of $13.4 million, representing our share of the gains recognized by Klépierre, which is included in gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the accompanying consolidated statements of operations and comprehensive income.

We have an interest in a European investee that had interests in nine Designer Outlet properties as of June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, our legal percentage ownership interests in these properties ranged from 45% to 94%.

In addition, we have a 50.0% 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. At June 30, 2018 and December 31, 2017, the carrying value of these equity instruments 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 $221.6 million and $230.3 million as of June 30, 2018 and December 31, 2017, 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 $155.2 million and $149.1 million as of June 30, 2018 and December 31, 2017, 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, and our investments in Aéropostale, ABG and HBS follows.

COMBINED BALANCE SHEETS


	June 30,		December 31,
	2018		2017
Assets:
Investment properties, at cost	$	18,580,295	$	18,328,747
Less - accumulated depreciation		6,618,858		6,371,363
		11,961,437		11,957,384
Cash and cash equivalents		970,605		956,084
Tenant receivables and accrued revenue, net		386,980		403,125
Deferred costs and other assets		389,710		355,585
Total assets	$	13,708,732	$	13,672,178
Liabilities and Partners’ Deficit:
Mortgages	$	15,252,252	$	14,784,310
Accounts payable, accrued expenses, intangibles, and deferred revenue		859,475		1,033,674
Other liabilities		386,151		365,857
Total liabilities		16,497,878		16,183,841
Preferred units		67,450		67,450
Partners’ deficit		(2,856,596)		(2,579,113)
Total liabilities and partners’ deficit	$	13,708,732	$	13,672,178
Our Share of:
Partners’ deficit	$	(1,240,838)	$	(1,144,620)
Add: Excess Investment		1,693,800		1,733,063
Our net Investment in unconsolidated entities, at equity	$	452,962	$	588,443

“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				For The Six
	Months Ended				Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
REVENUE:
Minimum rent	$	483,976	$	465,705	$	959,931	$	916,760
Overage rent		51,067		46,447		110,728		97,816
Tenant reimbursements		220,426		212,465		443,916		428,246
Other income		78,378		71,753		159,487		136,079
Total revenue		833,847		796,370		1,674,062		1,578,901
OPERATING EXPENSES:
Property operating		139,553		132,028		285,845		265,013
Depreciation and amortization		166,299		159,748		326,134		313,202
Real estate taxes		68,576		63,977		136,843		130,560
Repairs and maintenance		20,736		20,471		43,933		40,701
Advertising and promotion		20,884		21,836		45,108		44,034
Provision for credit losses		5,577		2,789		12,078		6,566
Other		49,885		45,030		99,617		88,384
Total operating expenses		471,510		445,879		949,558		888,460
Operating Income		362,337		350,491		724,504		690,441
Interest expense		(190,751)		(146,440)		(341,684)		(288,647)
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		25,792		—		25,792		—
Net Income	$	197,378	$	204,051	$	408,612	$	401,794
Third-Party Investors’ Share of Net Income	$	96,240	$	104,265	$	202,424	$	203,950
Our Share of Net Income		101,138		99,786		206,188		197,844
Amortization of Excess Investment		(21,395)		(22,979)		(42,921)		(45,436)
Our Share of Gain on Sale or Disposal of, or Recovery on, Assets and Interests in Unconsolidated Entities, net		(9,672)		—		(9,672)		—
Income from Unconsolidated Entities	$	70,071	$	76,807	$	153,595	$	152,408

Our share of income from unconsolidated entities in the above table, aggregated with our share of the results of Klépierre, and our investments in Aéropostale, ABG 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, or recovery on, assets and interests in unconsolidated entities, net is reflected within gain upon acquisition of controlling interests, sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the accompanying consolidated statements of operations and comprehensive income.