Investment in Unconsolidated Entities and International Investments

9 Months Ended

Sep. 30, 2020

Investments in Unconsolidated Entities and International Investments

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 84 properties as of September 30, 2020.

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 venture properties primarily in the form of interest bearing construction loans. As of September 30, 2020 and December 31, 2019, we had construction loans and other advances to these related parties totaling $86.4 million and $78.4 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Entity Transactions

In the third quarter of 2020, we recorded an other-than-temporary impairment charge of $55.2 million, representing our equity method investment balance in three joint venture properties, which is included in (loss) 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 February 19, 2020, we and a group of co-investors acquired certain assets and liabilities of Forever 21, 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. Our noncontrolling interest in each of the retail operations venture and in the licensing venture is 37.5%. Our aggregate investment in the ventures was $67.6 million. In connection with the acquisition of our interest, the Forever 21 joint venture recorded a non-cash bargain purchase gain in the second quarter of which our share of $35.0 million pre-tax is included in income from unconsolidated entities in the consolidated statement of operations and comprehensive income.

On June 10, 2020, we exercised our contractual right to terminate the February 10, 2020, Agreement and Plan of Merger, or the Merger Agreement, with Taubman Centers, Inc., or TCO, a publicly held Michigan corporation. We also filed an action in the Circuit Court for the 6th Judicial Circuit of Oakland County, Michigan against Taubman Centers, Inc. and The Taubman Realty Group Limited Partnership (collectively, Taubman) requesting a declaration that Taubman had suffered a Material Adverse Event under the Merger Agreement and had breached covenants and representations in the Merger Agreement. Taubman subsequently filed a counterclaim seeking specific performance of the Merger Agreement and, in the alternative, damages.

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 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 $17.3 million. The gain of $15.6 million is included in other income in the accompanying consolidated statement of operations and comprehensive income.

As of September 30, 2020 and December 31, 2019, we had an 11.7% legal noncontrolling equity interest in HBS, a joint venture we formed with Hudson’s Bay Company. In the third quarter of 2020, we recorded an other-than-temporary impairment charge of $36.1 million, which is included in (loss) 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, to reduce our investment in HBS to its estimated fair value. Our share of net income (loss), net of amortization of our excess investment, prior to the impairment charge was $0.9 million and ($5.2) million for the three months ended September 30, 2020 and 2019, respectively, and $1.9 million and ($13.3) million for the nine months ended September 30, 2020 and 2019, respectively.

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, and subsequently renamed SPARC Group.  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.  In January 2020, we acquired additional interests of 5.05% and 1.37% in SPARC Group and ABG, respectively, for $6.7 million and $33.5 million, respectively.  During the third quarter of 2020, SPARC acquired certain assets and operations of Brooks Brothers

and Lucky Brands out of bankruptcy.  At September 30, 2020, our noncontrolling equity method interests in the operations venture of SPARC Group and in ABG were 50.0% and 6.8%, respectively.

European Investments

At September 30, 2020, we owned 63,924,148 shares, or approximately 22.4%, of Klépierre, which had a quoted market price of $14.06 per share, which is below our carrying value.  We have evaluated this investment and believe that the impairment is not other-than-temporary. Our share of net income, net of amortization of our excess investment, was $4.3 million and $35.4 million for the three months ended September 30, 2020 and 2019, respectively, and $13.7 million and $74.4 million for the nine months ended September 30, 2020 and 2019, respectively. Based on applicable Euro:USD exchange rates and after our conversion of Klépierre’s results to GAAP, Klépierre’s total revenues, operating income before other items and consolidated net income were approximately $882.0 million, $195.2 million and $123.2 million, respectively, for the nine months ended September 30, 2020 and $1.1 billion, $481.0 million and $415.9 million, respectively, for the nine months ended September 30, 2019.

During the nine months ended September 30, 2020, we recorded a $7.8 million net loss related to the impairment and disposition of certain assets of Klépierre. During the nine months ended September 30, 2019, Klépierre completed the disposal of its interests in certain shopping centers and we recorded a gain of $12.8 million. These transactions are included in (loss) 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 ten Designer Outlet properties as of September 30, 2020 and nine Designer Outlet properties as of December 31, 2019, in each case, six of which are consolidated by us. As of September 30, 2020, 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, 2020 and December 31, 2019, 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 $203.9 million and $212.1 million as of September 30, 2020 and December 31, 2019, 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 $176.4 million and $173.9 million as of September 30, 2020 and December 31, 2019, 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, ABG, HBS, RGG, Forever 21, and SPARC Group as follows.

COMBINED BALANCE SHEETS

	September 30,		December 31,
	2020		2019
Assets:
Investment properties, at cost	$	19,841,675	$	19,525,665
Less - accumulated depreciation		7,802,948		7,407,627
		12,038,727		12,118,038
Cash and cash equivalents		973,669		1,015,864
Tenant receivables and accrued revenue, net		808,702		510,157
Right-of-use assets, net		181,713		185,302
Deferred costs and other assets		391,025		384,663
Total assets	$	14,393,836	$	14,214,024
Liabilities and Partners’ Deficit:
Mortgages	$	15,505,554	$	15,391,781
Accounts payable, accrued expenses, intangibles, and deferred revenue		909,616		977,112
Lease liabilities		184,473		186,594
Other liabilities		407,147		338,412
Total liabilities		17,006,790		16,893,899
Preferred units		67,450		67,450
Partners’ deficit		(2,680,404)		(2,747,325)
Total liabilities and partners’ deficit	$	14,393,836	$	14,214,024
Our Share of:
Partners’ deficit	$	(1,154,758)	$	(1,196,926)
Add: Excess Investment		1,414,067		1,525,903
Our net Investment in unconsolidated entities, at equity	$	259,309	$	328,977

“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.

COMBINED STATEMENTS OF OPERATIONS

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
REVENUE:
Lease income	$	601,522	$	766,740	$	1,919,618	$	2,285,848
Other income		94,630		79,025		215,349		234,337
Total revenue		696,152		845,765		2,134,967		2,520,185
OPERATING EXPENSES:
Property operating		129,024		149,759		383,363		434,742
Depreciation and amortization		175,716		171,407		512,705		512,070
Real estate taxes		68,464		64,172		197,487		200,698
Repairs and maintenance		16,457		20,729		49,661		61,938
Advertising and promotion		9,901		19,831		42,669		63,852
Other		41,857		45,747		107,822		142,806
Total operating expenses		441,419		471,645		1,293,707		1,416,106
Operating Income Before Other Items		254,733		374,120		841,260		1,104,079
Interest expense		(154,579)		(159,971)		(463,629)		(473,914)
Gain on sale or disposal of assets and interests in unconsolidated entities, net		—		—		—		21,587
Net Income	$	100,154	$	214,149	$	377,631	$	651,752
Third-Party Investors’ Share of Net Income	$	46,785	$	108,792	$	193,633	$	332,078
Our Share of Net Income		53,369		105,357		183,998		319,674
Amortization of Excess Investment		(20,543)		(20,846)		(62,144)		(62,413)
Our Share of Gain on Sale or Disposal of Assets and Interests in Other Income in the Consolidated Financial Statements		—		—		—		(9,156)
Income from Unconsolidated Entities	$	32,826	$	84,511	$	121,854	$	248,105

Our share of income from unconsolidated entities in the above table, aggregated with our share of the results of Klépierre, ABG, HBS, RGG, Forever 21, and SPARC Group 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 assets and interests in unconsolidated entities, net is reflected within (loss) 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.