6. Investment in Unconsolidated Entities and International Investments

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 March 31, 2019.

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, 2019 and December 31, 2018, we had construction loans and other advances to related parties totaling $86.0 million and $85.8 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Entity Transactions

During the first three months of 2019, we disposed of our interests in a multi-family residential investment. Our share of the gross proceeds was $17.3 million. The gain of $15.6 million is included in other income in the accompanying consolidated statement of operations and comprehensive income.

On September 25, 2018, as discussed in note 4, 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.

As of March 31, 2019 and December 31, 2018, we had an 11.7% legal noncontrolling equity interest in HBS, a joint venture we formed with Hudson’s Bay Company. Our share of net income (loss), net of amortization of our excess investment, was ($2.6) million and $4.0 million for the three months ended March 31, 2019 and 2018, respectively. Total revenues, operating income and consolidated net income (loss) were approximately $33.4 million, $1.4 million and ($10.2) million, respectively, for the three months ended March 31, 2019 and $87.2 million, $76.8 million and $51.6 million, respectively, for the three months ended March 31, 2018.

European Investments

At March 31, 2019, we owned 63,924,148 shares, or approximately 21.6%, of Klépierre, which had a quoted market price of $34.98 per share. Our share of net income, net of amortization of our excess investment, was $17.8 million and $22.9 million for the three months ended March 31, 2019 and 2018, 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 $377.2 million, $147.4 million and $114.6 million, respectively, for the three months ended March 31, 2019 and $410.3 million, $135.8 million and $202.3 million, respectively, for the three months ended March 31, 2018.

During the three months ended March 31, 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 on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the accompanying consolidated statement of operations and comprehensive income.

We have an interest in a European investee that had interests in nine Designer Outlet properties as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, 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 March 31, 2019 and December 31, 2018, 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 $235.2 million and $232.1 million as of March 31, 2019 and December 31, 2018, 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 $169.9 million and $166.3 million as of March 31, 2019 and December 31, 2018, 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, Aéropostale, ABG, and HBS follows.

COMBINED BALANCE SHEETS


	March 31,		December 31,
	2019		2018
Assets:
Investment properties, at cost	$	18,887,972	$	18,807,449
Less - accumulated depreciation		6,971,412		6,834,633
		11,916,560		11,972,816
Cash and cash equivalents		1,012,497		1,076,398
Tenant receivables and accrued revenue, net		407,040		445,148
Deferred costs and other assets		617,399		390,818
Total assets	$	13,953,496	$	13,885,180
Liabilities and Partners’ Deficit:
Mortgages	$	15,202,622	$	15,235,415
Accounts payable, accrued expenses, intangibles, and deferred revenue		876,348		976,311
Other liabilities		560,101		344,205
Total liabilities		16,639,071		16,555,931
Preferred units		67,450		67,450
Partners’ deficit		(2,753,025)		(2,738,201)
Total liabilities and partners’ deficit	$	13,953,496	$	13,885,180
Our Share of:
Partners’ deficit	$	(1,184,895)	$	(1,168,216)
Add: Excess Investment		1,581,225		1,594,198
Our net Investment in unconsolidated entities, at equity	$	396,330	$	425,982

“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 has been determined to relate to the fair value of the 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,
	2019		2018
REVENUE:
Lease income	$	758,979	$	752,606
Other income		75,922		81,108
Total revenue		834,901		833,714
OPERATING EXPENSES:
Property operating		144,721		146,293
Depreciation and amortization		170,258		159,836
Real estate taxes		68,717		68,267
Repairs and maintenance		22,376		23,196
Advertising and promotion		24,326		24,224
Other		49,316		49,732
Total operating expenses		479,714		471,548
Operating Income Before Other Items		355,187		362,166
Interest expense		(156,016)		(150,932)
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		21,587		—
Net Income	$	220,758	$	211,234
Third-Party Investors’ Share of Net Income	$	112,668	$	106,183
Our Share of Net Income		108,090		105,051
Amortization of Excess Investment		(20,792)		(21,527)
Our Share of Gain on Sale or Disposal of Assets and Interest in Other Income in the Consolidated Financial Statements		(9,155)		—
Income from Unconsolidated Entities	$	78,143	$	83,524

Our share of income from unconsolidated entities in the above table, aggregated with our share of the results of Klépierre, 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 on 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.