Investment in Unconsolidated Entities and International Investments

12 Months Ended

Dec. 31, 2019

Investments in Unconsolidated Entities and International Investments

Investments in Unconsolidated Entities and International Investments

6. Investments 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 December 31, 2019 and 81 properties as of December 31, 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 December 31, 2019 and 2018, we had construction loans and other advances to related parties totaling $78.4 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.  We attributed substantially all of our investment to goodwill and certain amortizing and non-amortizing intangibles.

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 $17.9 million. The gain of $16.2 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 December 31, 2019 and 2018, we had an 11.7%noncontrolling equity interest in HBS, a joint venture we formed with Hudson’s Bay Company. In the fourth quarter of 2019, we recorded an impairment charge of $47.2 million to reduce our investment in HBS to its estimated fair value.  During the fourth quarter of 2018, our interest in the German department store properties was sold to Hudson’s Bay Company and SIGNA Retail Holdings resulting in a gain of $91.1 million. These amounts are included in gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities and impairment, net in the consolidated statements of operations and comprehensive income.  Our share of net (loss) income, net of amortization of our excess investment excluding impairment, was ($16.2) million and $15.1 million for the year ended December 31, 2019 and 2018, respectively.  Total revenues, operating income before other items and consolidated net (loss) income were approximately $133.4 million, $26.5 million and ($24.7) million, respectively, for the year ended December 31, 2019 and $326.3 million, $196.3 million, and $105.9 million, respectively for the year ended December 31, 2018.

On June 7, 2018, Aventura Mall, a property in which we own a noncontrolling 33.3% interest, refinanced its $1.2 billion mortgage loan and its $200.8 million construction loan with a $1.75 billion mortgage loan 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 May 2017, Colorado Mills, a property in which we have a noncontrolling 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 December 31, 2019, the property had received business interruption proceeds and also property damage proceeds of $67.9 million, which resulted in the property recording a $3.0 million gain in 2019. As of December 31, 2018, the property had received business interruption proceeds and also property damage proceeds of $65.9 million, which resulted in the property recording a $33.4 million gain in 2018.  For the periods ended December 31, 2019 and 2018, respectively, our $1.1 million and $12.5 million share of the gain 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.

In 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 December 31, 2019, our noncontrolling equity method interests in the operations venture of Aéropostale and in ABG were 44.95% and 5.40%, respectively.

International Investments

We conduct our international operations primarily through joint venture arrangements and account for the majority of these international joint venture investments using the equity method of accounting.

European Investments  

At December 31, 2019, we owned 63,924,148 shares, or approximately 22.2%, of Klépierre, which had a quoted market price of $37.96 per share.  Our share of net income, net of amortization of our excess investment, was $145.2 million, $98.8 million and $50.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. Based on applicable Euro:USD exchange rates and after our conversion of Klépierre’s results to GAAP, Klépierre’s total assets, total liabilities, and noncontrolling interests were $19.6 billion, $12.9 billion, and $1.3 billion, respectively, as of December 31, 2019 and $20.0 billion, $12.7 billion, and $1.4 billion, respectively, as of December 31, 2018. Klépierre’s total revenues, operating income before other items and consolidated net income were approximately $1.5 billion, $626.3 million and $655.5 million, respectively, for the year ended December 31, 2019, $1.6 billion, $670.4 million and $693.0 million, respectively, for the year ended December 31, 2018, and $1.5 billion, $545.7 million and $381.3 million, respectively, for the year ended December 31, 2017.

During the years ended December 31, 2019, 2018 and 2017, Klépierre completed the disposal of its interests in certain shopping centers. In connection with these disposals, we recorded gains of $58.6 million, $20.2 million and $5.0 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, of which six are consolidated by us, as of December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, our legal percentage ownership interests in these properties ranged from 45% to 94%. Due to certain redemption rights held by our venture partner, which will require us to purchase their interests under certain circumstances, the noncontrolling interest is presented (i) in the accompanying Simon consolidated balance sheets 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 sheets within preferred units, various series, at liquidation value, and noncontrolling redeemable interests in properties.

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 $17.9 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 May 2017, the assumed loan was refinanced with a $69.0 million mortgage loan due in 2024, after available extension options, with an interest rate of EURIBOR plus 1.85%. Substantially all of our investment has been determined to relate to investment property based on estimated fair value at the acquisition date.

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 December 31, 2019 and 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 $212.1 million and $232.1 million as of December 31, 2019 and 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

$173.9 million and $166.3 million as of December 31, 2019 and 2018, respectively, including all related components of accumulated other comprehensive income (loss).

Summary Financial Information

A summary of the combined balance sheets and statements of operations of our equity method investments and share of income from such investments, excluding Klépierre, Aéropostale, ABG, HBS, and RGG, follows.

COMBINED BALANCE SHEETS

	December 31,		December 31,
	2019		2018
Assets:
Investment properties, at cost	$	19,525,665	$	18,807,449
Less - accumulated depreciation		7,407,627		6,834,633
		12,118,038		11,972,816
Cash and cash equivalents		1,015,864		1,076,398
Tenant receivables and accrued revenue, net		510,157		445,148
Right-of-use assets, net		185,302		—
Deferred costs and other assets		384,663		390,818
Total assets	$	14,214,024	$	13,885,180
Liabilities and Partners’ Deficit:
Mortgages	$	15,391,781	$	15,235,415
Accounts payable, accrued expenses, intangibles, and deferred revenue		977,112		976,311
Lease liabilities		186,594		—
Other liabilities		338,412		344,205
Total liabilities		16,893,899		16,555,931
Preferred units		67,450		67,450
Partners’ deficit		(2,747,325)		(2,738,201)
Total liabilities and partners’ deficit	$	14,214,024	$	13,885,180
Our Share of:
Partners’ deficit	$	(1,196,926)	$	(1,168,216)
Add: Excess Investment		1,525,903		1,594,198
Our net Investment in unconsolidated entities, at equity	$	328,977	$	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, intangible assets, including goodwill, 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.

As of December 31, 2019, scheduled principal repayments on these joint venture properties’ mortgage indebtedness are as follows:

2020	$	946,309
2021		2,476,864
2022		1,927,938
2023		1,267,179
2024		2,297,118
Thereafter		6,512,206
Total principal maturities		15,427,614
Debt issuance costs		(35,833)
Total mortgages	$	15,391,781

This debt becomes due in installments over various terms extending through 2035 with interest rates ranging from 0.18% to 10.53% and a weighted average interest rate of 3.94% at December 31, 2019.

COMBINED STATEMENTS OF OPERATIONS

	December 31,
	2019		2018		2017
REVENUE:
Lease income	$	3,088,594	$	3,045,668	$	2,933,655
Other income		322,398		326,575		290,515
Total revenue		3,410,992		3,372,243		3,224,170
OPERATING EXPENSES:
Property operating		587,062		590,921		551,885
Depreciation and amortization		681,764		652,968		640,286
Real estate taxes		266,013		259,567		245,646
Repairs and maintenance		85,430		87,408		81,309
Advertising and promotion		89,660		87,349		86,480
Other		196,178		187,292		184,037
Total operating expenses		1,906,107		1,865,505		1,789,643
Operating Income Before Other Items		1,504,885		1,506,738		1,434,527
Interest expense		(636,988)		(663,693)		(593,062)
Gain (loss) on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		24,609		33,367		(2,239)
Net Income	$	892,506	$	876,412	$	839,226
Third-Party Investors’ Share of Net Income	$	460,696	$	436,767	$	424,533
Our Share of Net Income	$	431,810	$	439,645	$	414,693
Amortization of Excess Investment		(83,556)		(85,252)		(89,804)
Our Share of Gain on Sale or Disposal of Assets and Interests in Other Income in the Consolidated Financial Statements		(9,156)		—		—
Our Share of (Gain) Loss on Sale or Disposal of, or Recovery on, Assets and Interests in Unconsolidated Entities, net		(1,133)		(12,513)		1,342
Income from Unconsolidated Entities	$	337,965	$	341,880	$	326,231

Our share of income from unconsolidated entities in the above table, aggregated with our share of results of Klépierre, Aéropostale, ABG, HBS, and RGG, 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 (loss) 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.