Investments in Unconsolidated Entities and International Investments

9 Months Ended

Sep. 30, 2022

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 82 properties as of September 30, 2022.

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, 2022 and December 31, 2021, we had construction loans and other advances to these related parties totaling $112.1 million and $88.4 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Entity Transactions

On December 29, 2020, we completed the acquisition of an 80% noncontrolling ownership interest in TRG, which has an interest in 24 regional, super-regional, and outlet malls in the U.S. and Asia. Under the terms of the transaction, we, through the Operating Partnership, acquired all of Taubman Centers, Inc., or Taubman, common stock for $43.00 per share in cash. Total consideration for the acquisition, including the redemption of Taubman’s $192.5 million 6.5% Series J Cumulative Preferred Shares and its $170.00 million 6.25% Series K Cumulative Preferred Shares, and the issuance of 955,705 Operating Partnership units, was approximately $3.5 billion. Our investment includes the 6.38% Series A Cumulative Redeemable Preferred Units for $362.5 million issued to us. Substantially all of our investment has been allocated to investment property based upon fair values determined at the acquisition date using Level 2 and 3 inputs.

The table below represents summary financial information of TRG.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total revenues	$	161,503	$	152,043	$	504,034	$	436,409
Operating income before other items		57,355		51,893		192,414		137,368
Consolidated net income		35,500		25,224		123,304		55,364
Our share of net income, net of amortization of our excess investment		(15,953)		(11,477)		(44,574)		(49,943)

During the third quarter of 2022, we recorded a non-cash gain of $19.9 million related to the disposition and foreclosure of one unconsolidated property in satisfaction of the respective $99.6 million non-recourse mortgage loan, which is included in gain on acquisition of controlling interest, 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.

On July 1, 2021, we contributed to ABG all of our interests in both the Forever 21 and Brooks Brothers licensing ventures in exchange for additional interests in ABG. As a result, in the third quarter of 2021, we recognized a non-cash, pre-tax gain of $159.8 million representing the difference between the fair value of the interests received determined using Level 3 inputs and the carrying value of $102.7 million of the intellectual property licensing ventures less costs to sell, and this non-cash investing and financing activity is excluded from our consolidated statement of cash flows. In connection with this transaction, we recorded deferred taxes of $47.9 million. On December 20, 2021, we sold a portion of our interest in ABG, resulting in a pre-tax gain of $18.8 million. In connection with this transaction, we recorded tax expense of $8.0 million. Subsequently, we acquired additional interests in ABG for cash consideration of $100.0 million. At September 30, 2022, our interest in ABG was approximately 10.4%.

During the fourth quarter of 2021, we disposed of our interest in an unconsolidated property resulting in a gain of $3.4 million. Our share of the proceeds from this transaction was $3.0 million.

On June 1, 2021, we and our partner, ABG, acquired the licensing rights of Eddie Bauer. Our non-controlling interest in the licensing venture, Eddie Bauer Ipco, is 49% and was acquired for cash consideration of $100.8 million.

During the second quarter of 2021, we sold our interest in one multi-family residential investment resulting in a gain of $14.9 million. Our share of the gross proceeds from this transaction was $27.1 million.

On December 7, 2020, we and a group of co-investors acquired certain assets and liabilities of J.C. Penney, a department store retailer, out of bankruptcy.  Our non-controlling interest in the venture is 41.67% and was acquired for cash consideration of $125.0 million.

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 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 2020, of which our share was $35.0 million pre-tax. In the first quarter of 2021, we and our partner, ABG, each acquired additional 12.5% interests in the licensing and operations of Forever 21, our share of which was $56.3 million, bringing our respective interests to 50%. Subsequently, the Forever 21 operations were merged into SPARC Group.

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, 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.  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 Group acquired certain assets and operations of Brooks Brothers and Lucky Brands out of bankruptcy.  During the second quarter of 2021, SPARC Group acquired certain assets and operations of Eddie Bauer. During the first quarter of 2022, SPARC Group

acquired certain assets and operations of Reebok and entered into a long-term strategic partnership agreement with ABG to become the core licensee and operating partner for Reebok in the United States. At September 30, 2022, our noncontrolling equity method interests in SPARC Group was 50.0%.

The table below represents combined summary financial information, after intercompany eliminations, of our other platform investments.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total revenues	$	3,543,438	$	3,560,993	$	10,247,196	$	9,675,055
Operating income before other items		337,119		445,670		596,234		975,286
Consolidated net income		280,999		410,258		454,606		869,766
Our share of net income, net of amortization of our excess investment		61,462		106,306		146,820		253,826

European Investments

At September 30, 2022, we owned 63,924,148 shares, or approximately 22.4%, of Klépierre, which had a quoted market price of $17.54 per share. The table below represents summary financial information with respect to our investment in Klépierre. This information is based on applicable Euro:USD exchange rates and after our conversion of Klépierre’s results to GAAP.

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Total revenues	$	265,348	$	298,790	$	940,408	$	840,396
Operating income before other items		103,087		102,325		411,965		215,295
Consolidated net income		84,723		91,503		311,608		619,942
Our share of net income, net of amortization of our excess investment		24,224		8,947		51,981		115,874

During the three and nine months ended September 30, 2022, Klépierre completed the disposal of its interest in certain shopping centers and we recorded a loss of $3.3 million. This transaction is included in gain on acquisition of controlling interest, 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.

During the nine months ended September 30, 2021, Klépierre elected to step-up the tax basis of certain assets in Italy, which triggered a one-time payment at a significantly reduced tax rate. As a result of the step-up in tax basis, a previously established deferred tax liability was reversed resulting in a non-cash gain, of which our share was $118.4 million.

We have an interest in a European investee that had interests in 11 Designer Outlet properties as of September 30, 2022 and December 31, 2021, seven of which are consolidated by us as of September 30, 2022. As of September 30, 2022, our legal percentage ownership interests in these properties ranged from 23% to 94%.

On January 1, 2021, our European investee gained control of Ochtrup Designer Outlets as a result of the expiration of certain participating rights held by a venture partner. This resulted in the consolidation of the property and related mortgage of $47.1 million, requiring a remeasurement of our previously held equity interest, which had a carrying value of $48.7 million, to fair value and the recognition of a non-cash gain of $3.7 million in earnings during the first quarter of 2021, which includes amounts reclassified from accumulated other comprehensive income (loss) related to the currency translation adjustment previously recorded on our investment. The non-cash gain is included in gain on acquisition of controlling interest, 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, and this non-cash investing and financing activity is excluded from our consolidated

statement of cash flows. The determination of the fair value consisted of Level 2 and 3 inputs and was predominately allocated to investment property.

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, 2022 and December 31, 2021, 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 $185.3 million and $206.1 million as of September 30, 2022 and December 31, 2021, 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 $199.4 million and $194.9 million as of September 30, 2022 and December 31, 2021, 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 our investments in Klépierre and TRG as well as our other platform investments, follows.

COMBINED BALANCE SHEETS

	September 30,		December 31,
	2022		2021
Assets:
Investment properties, at cost	$	18,889,882	$	19,724,242
Less - accumulated depreciation		8,315,951		8,330,891
		10,573,931		11,393,351
Cash and cash equivalents		1,375,947		1,481,287
Tenant receivables and accrued revenue, net		493,643		591,369
Right-of-use assets, net		132,665		154,561
Deferred costs and other assets		451,414		394,691
Total assets	$	13,027,600	$	14,015,259
Liabilities and Partners’ Deficit:
Mortgages	$	14,455,676	$	15,223,710
Accounts payable, accrued expenses, intangibles, and deferred revenue		870,351		995,392
Lease liabilities		121,668		158,372
Other liabilities		363,615		383,018
Total liabilities		15,811,310		16,760,492
Preferred units		67,450		67,450
Partners’ deficit		(2,851,160)		(2,812,683)
Total liabilities and partners’ deficit	$	13,027,600	$	14,015,259
Our Share of:
Partners’ deficit	$	(1,238,149)	$	(1,207,396)
Add: Excess Investment		1,228,164		1,283,645
Our net (deficit) Investment in unconsolidated entities, at equity	$	(9,985)	$	76,249

“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,
	2022		2021		2022		2021
REVENUE:
Lease income	$	710,084	$	719,723	$	2,142,068	$	2,053,826
Other income		72,355		67,630		258,446		204,923
Total revenue		782,439		787,353		2,400,514		2,258,749
OPERATING EXPENSES:
Property operating		153,002		151,008		445,214		420,174
Depreciation and amortization		169,453		170,568		504,926		512,165
Real estate taxes		59,008		66,221		187,697		203,242
Repairs and maintenance		17,632		18,274		58,322		53,625
Advertising and promotion		17,153		18,238		52,718		52,479
Other		48,866		43,400		146,595		113,042
Total operating expenses		465,114		467,709		1,395,472		1,354,727
Operating Income Before Other Items		317,325		319,644		1,005,042		904,022
Interest expense		(147,539)		(154,501)		(438,559)		(453,145)
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		4,522		—		4,522		33,371
Net Income	$	174,308	$	165,143	$	571,005	$	484,248
Third-Party Investors’ Share of Net Income	$	83,222	$	82,639	$	280,919	$	243,525
Our Share of Net Income		91,086		82,504		290,086		240,723
Amortization of Excess Investment		(14,928)		(15,199)		(45,153)		(49,794)
Our Share of Gain on Sale or Disposal of Assets and Interests in Other Income in the Consolidated Financial Statements		—		—		—		(14,941)
Our Share of Gain on Sale or Disposal of Assets and Interests in Unconsolidated Entities, net		(2,532)		—		(2,532)		—
Income from Unconsolidated Entities	$	73,626	$	67,305	$	242,401	$	175,988

Our share of income from unconsolidated entities in the above table, aggregated with our share of results from our investments in Klépierre and TRG as well as our other platform investments, before any applicable taxes, 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 acquisition of controlling interest sale or disposal of assets and interests in unconsolidated entities, net is reflected within gain on acquisition of controlling interest, 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.