Investment in Unconsolidated Entities and International Investments

9 Months Ended

Sep. 30, 2019

Investment in Unconsolidated Entities

Investments in Unconsolidated Entities and International Investments

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 82 properties as of September 30, 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 September 30, 2019 and December 31, 2018, we had construction loans and other advances to related parties totaling $85.7 million and $85.8 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Entity Transactions

On October 16, 2019, we contributed approximately $276.8 million consisting of cash and the Shop Premium Outlets, or SPO, assets for a 45% noncontrolling interest in Rue Gilt Groupe, or RGG, to create a new multi-platform venture dedicated to digital value shopping.

On September 19, 2019, as discussed in note 4, we acquired the remaining 50% interest in a hotel adjacent to one of our properties from our joint venture partner. As a result of this acquisition, we now own 100% of this property.

During the first quarter 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 September 30, 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 (loss) income, net of amortization of our excess investment, was ($5.2) million and $4.3 million for the three months ended September 30, 2019 and 2018, respectively, and ($13.3) million and $11.9 million for the nine months ended September 30, 2019 and 2018, respectively. Total revenues, operating income and consolidated net (loss) income of HBS were approximately $100.2 million, $13.8 million and ($23.9) million, respectively, for the nine months ended September 30, 2019 and $258.8 million, $162.2 million and $90.6 million, respectively, for the nine months ended September 30, 2018.

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, 2019, the property had received business interruption proceeds and also property damage proceeds of $66.8 million. As of September 30, 2018, the property had received business interruption proceeds and 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 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.

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, 2019, our noncontrolling equity method interests in the operations venture of Aéropostale and in ABG were 44.95% and 5.40%, respectively.

European Investments

At September 30, 2019, we owned 63,924,148 shares, or approximately 21.9%, of Klépierre, which had a quoted market price of $34.02 per share. Our share of net income, net of amortization of our excess investment, was $35.4 million and $22.4 million for the three months ended September 30, 2019 and 2018, respectively, and $74.4 million and $70.0 million for the nine months ended September 30, 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 $1.1 billion, $481.0 million and $415.9 million, respectively, for the nine months ended September 30, 2019 and $1.2 billion, $496.4 million and $485.8 million, respectively, for the nine months ended September 30, 2018.

During the nine months ended September 30, 2019 and 2018, Klépierre completed the disposal of its interests in certain shopping centers.  In connection with these disposals, we recorded gains of $12.8 million and $13.4 million, respectively, 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 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, 2019 and December 31, 2018, respectively. As of September 30, 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 also have a direct minority ownership in three of those outlets. At September 30, 2019 and December 31, 2018, the carrying value of these equity instruments without readily determinable fair values 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 $205.8 million and $232.1 million as of September 30, 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 $167.0 million and $166.3 million as of September 30, 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

	September 30,		December 31,
	2019		2018
Assets:
Investment properties, at cost	$	19,259,601	$	18,807,449
Less - accumulated depreciation		7,263,363		6,834,633
		11,996,238		11,972,816
Cash and cash equivalents		880,648		1,076,398
Tenant receivables and accrued revenue, net		475,710		445,148
Deferred costs and other assets		581,435		390,818
Total assets	$	13,934,031	$	13,885,180
Liabilities and Partners’ Deficit:
Mortgages	$	15,217,266	$	15,235,415
Accounts payable, accrued expenses, intangibles, and deferred revenue		942,250		976,311
Other liabilities		521,518		344,205
Total liabilities		16,681,034		16,555,931
Preferred units		67,450		67,450
Partners’ deficit		(2,814,453)		(2,738,201)
Total liabilities and partners’ deficit	$	13,934,031	$	13,885,180
Our Share of:
Partners’ deficit	$	(1,227,239)	$	(1,168,216)
Add: Excess Investment		1,540,770		1,594,198
Our net Investment in unconsolidated entities, at equity	$	313,531	$	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 primarily relate to the fair value of the investment properties, intangible assets, and debt premiums and discounts. We amortize excess investment over the life of the related depreciable components of assets acquired, typically no greater than 40 years, the terms of the applicable leases, the estimated useful lives of the finite lived intangibles, 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				For the Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
REVENUE:
Lease income	$	766,740	$	756,955	$	2,285,848	$	2,259,451
Other income		79,025		73,259		234,337		232,747
Total revenue		845,765		830,214		2,520,185		2,492,198
OPERATING EXPENSES:
Property operating		149,759		151,873		434,742		437,718
Depreciation and amortization		171,407		161,964		512,070		488,098
Real estate taxes		64,172		60,654		200,698		197,497
Repairs and maintenance		20,729		20,035		61,938		63,968
Advertising and promotion		19,831		20,318		63,852		65,425
Other		45,747		43,916		142,806		143,533
Total operating expenses		471,645		458,760		1,416,106		1,396,239
Operating Income Before Other Items		374,120		371,454		1,104,079		1,095,959
Interest expense		(159,971)		(163,855)		(473,914)		(505,540)
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		—		—		21,587		25,792
Net Income	$	214,149	$	207,599	$	651,752	$	616,211
Third-Party Investors’ Share of Net Income	$	108,792	$	101,750	$	332,078	$	304,174
Our Share of Net Income		105,357		105,849		319,674		312,037
Amortization of Excess Investment		(20,846)		(21,526)		(62,413)		(64,447)
Our Share of Gain on Sale or Disposal of Assets and Interest in Other Income in the Consolidated Financial Statements		—		—		(9,156)		—
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	$	84,511	$	84,323	$	248,105	$	237,918

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.