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 81 properties as of September 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 September 30, 2018 and December 31, 2017, we had construction loans and other advances to related parties totaling $86.0 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 September 25, 2018, as discussed in Note 9, we acquired the remaining 50% interest in The Outlets at Orange from our joint venture partner. The Operating Partnership issued 475,183 units at a price of $176.99 to acquire this remaining interest. As a result of this acquisition, we now own 100% of this property.

On September 11, 2018, we announced a joint venture with Macerich to co-develop, co-own, and jointly lease the approximately 400,000 square foot Los Angeles Premium Outlets, followed by a proposed phase II of an additional 166,000 square feet. As of September 30, 2018, we had contributed $13.1 million to the venture. We own a 50% noncontrolling interest in this project, which is scheduled to open in the fall of 2021.

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 September 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 September 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 September 30, 2018 and December 31, 2017, we had an 11.7% noncontrolling equity interest in HBS, a joint venture we formed with Hudson’s Bay Company. HBS has 42 properties in the U.S. and, subsequent to formation, acquired 41 properties from Kaufhof. As of September 30, 2018, we had contributed $68.3 million for improvements to certain properties. In addition, we contributed $178.5 million in connection with the HBS acquisition of the Kaufhof department stores. On September 11, 2018, Hudson’s Bay Company announced that HBS intends to sell its interest in the Kaufhof department stores to Hudson’s Bay Company and SIGNA Retail Holdings. HBS will retain its ownership in the properties in the U.S. and we will continue to hold an 11.7% noncontrolling interest in the remaining HBS joint venture subsequent to the closing of the transaction, which is expected to occur in the fourth quarter of 2018. Our share of net income, net of amortization of our excess investment, was $4.3 million and $4.8 million for the three months ended September 30, 2018 and 2017, respectively, and $11.9 million and $11.3 million for the nine months ended September 30, 2018 and 2017, respectively. Total revenues, operating income and consolidated net income were approximately $258.8 million, $162.2 million and $90.6 million, respectively, for the nine months ended September 30, 2018 and $265.8 million, $246.9 million and $176.2 million, respectively, for the nine months ended September 30, 2017.

European Investments

At September 30, 2018, we owned 63,924,148 shares, or approximately 21.2%, of Klépierre, which had a quoted market price of $35.43 per share. Our share of net income, net of amortization of our excess investment, was $22.4 million and $14.1 million for the three months ended September 30, 2018 and 2017, respectively, and $70.0 million and $37.2 million for the nine months ended September 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 $1.2 billion, $496.4 million and $485.8 million, respectively, for the nine months ended September 30, 2018 and $1.1 billion, $406.3 million and $298.3 million, respectively, for the nine months ended September 30, 2017.

During the nine months ended September 30, 2018 and September 30, 2017, Klépierre completed the disposal of its interests in certain shopping centers. In connection with these disposals, we recorded a gain of $13.4 million and $5.0 million, respectively, 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 September 30, 2018 and December 31, 2017, respectively. As of September 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 September 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 $221.2 million and $230.3 million as of September 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 $159.8 million and $149.1 million as of September 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


	September 30,		December 31,
	2018		2017
Assets:
Investment properties, at cost	$	18,632,287	$	18,328,747
Less - accumulated depreciation		6,672,267		6,371,363
		11,960,020		11,957,384
Cash and cash equivalents		1,013,153		956,084
Tenant receivables and accrued revenue, net		403,315		403,125
Deferred costs and other assets		395,144		355,585
Total assets	$	13,771,632	$	13,672,178
Liabilities and Partners’ Deficit:
Mortgages	$	15,231,476	$	14,784,310
Accounts payable, accrued expenses, intangibles, and deferred revenue		903,599		1,033,674
Other liabilities		351,116		365,857
Total liabilities		16,486,191		16,183,841
Preferred units		67,450		67,450
Partners’ deficit		(2,782,009)		(2,579,113)
Total liabilities and partners’ deficit	$	13,771,632	$	13,672,178
Our Share of:
Partners’ deficit	$	(1,204,237)	$	(1,144,620)
Add: Excess Investment		1,614,277		1,733,063
Our net Investment in unconsolidated entities, at equity	$	410,040	$	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 Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
REVENUE:
Minimum rent	$	483,685	$	466,601	$	1,443,617	$	1,383,361
Overage rent		52,417		52,560		163,144		150,376
Tenant reimbursements		222,153		215,774		666,068		644,020
Other income		73,259		74,208		232,747		210,287
Total revenue		831,514		809,143		2,505,576		2,388,044
OPERATING EXPENSES:
Property operating		151,873		145,288		437,718		410,301
Depreciation and amortization		161,964		156,682		488,098		469,884
Real estate taxes		60,654		54,668		197,497		185,228
Repairs and maintenance		20,035		18,811		63,968		59,512
Advertising and promotion		20,318		19,837		65,425		63,871
Provision for credit losses		1,300		1,063		13,378		7,629
Other		43,916		45,174		143,533		133,558
Total operating expenses		460,060		441,523		1,409,617		1,329,983
Operating Income		371,454		367,620		1,095,959		1,058,061
Interest expense		(163,855)		(149,746)		(505,540)		(438,393)
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		—		—		25,792		—
Net Income	$	207,599	$	217,874	$	616,211	$	619,668
Third-Party Investors’ Share of Net Income	$	101,750	$	110,581	$	304,174	$	314,531
Our Share of Net Income		105,849		107,293		312,037		305,137
Amortization of Excess Investment		(21,526)		(22,608)		(64,447)		(68,045)
Our Share of Gain on Sale or Disposal of, or Recovery on, Assets and Interests in Unconsolidated Entities, net		—		—		(9,672)		—
Income from Unconsolidated Entities	$	84,323	$	84,685	$	237,918	$	237,092

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.