Investments in Unconsolidated Entities and International Investments

6 Months Ended

Jun. 30, 2023

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 June 30, 2023.

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 June 30, 2023 and December 31, 2022, we had construction loans and other advances to these related parties totaling $109.8 million and $112.0 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

During 2022, we recorded a non-cash gain of $19.9 million related to the disposition and foreclosure of two unconsolidated properties in satisfaction of the respective $99.6 million and $83.1 million non-recourse mortgage loans. This non-cash investing and financing activity is excluded from our consolidated statement of cash flows.

Taubman Realty Group

We own 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. Our investment includes 6.38% Series A Cumulative Redeemable Preferred Units for $362.5 million issued to us.

The table below represents summary financial information of TRG.

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Total revenues	$	163,097	$	179,922	$	332,825	$	342,531
Operating income before other items		61,916		73,206		136,694		135,059
Consolidated net income		25,722		49,135		70,675		87,804
Our share of net income		20,216		38,886		55,064		69,429
Amortization of excess investment		(47,390)		(49,025)		(94,780)		(98,050)

Other Platform Investments

As of June 30, 2023, we own a 41.67% non-controlling interest in J.C. Penney, a department store retailer. We also own a 50% non-controlling interest in SPARC Group. 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.

During the second quarter of 2023, ABG completed a capital transaction resulting in a dilution of our ownership to approximately 11.8% and a deemed disposal of a proportional interest of our investment. As a result, we recognized a non-cash pre-tax gain on the deemed disposal of $36.4 million, which is included in gain on disposal, exchange, or revaluation of equity interests in the consolidated statement of operations and comprehensive income. This non-cash investing activity is excluded from our consolidated statement of cash flows. In connection with this transaction, we recorded deferred taxes of $9.1 million, which is included in income and other tax (expense) benefit, in the consolidated statement of operations and comprehensive income.  

On December 1, 2022, we sold to ABG all of our interests in the licensing venture of Eddie Bauer for additional interests in ABG. As a result, in the fourth quarter of 2022, we recognized a non-cash pre-tax gain of $159.0 million, representing the difference between the fair value of the interests received determined using Level 3 inputs and the $98.8 million carrying value of the intellectual property licensing venture less costs to sell.  This non-cash investing activity is excluded from our consolidated statement of cash flows. In connection with this transaction, we recorded deferred taxes of $39.7 million.  

On July 1, 2021, we sold 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. This non-cash investing 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.

As of June 30, 2023, we own a 45% non-controlling interest in Rue Gilt Groupe.

On December 19, 2022, we completed the acquisition of a 50% non-controlling legal ownership interest in Jamestown, a global real estate investment and asset management company, as well as separate interests in certain real estate and working capital, for total cash consideration of $173.4 million. Allocation of the excess investment to the underlying assets and liabilities acquired at the venture level is preliminary at June 30, 2023.

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

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Total revenues	$	3,192,530	$	3,562,900	$	6,149,251	$	6,703,758
Operating income before other items		103,118		374,336		85,250		259,115
Consolidated net income		(9,401)		333,019		(128,366)		173,607
Our share of net income (loss)		8,053		78,798		(29,736)		88,687
Amortization of excess investment		(1,665)		(1,665)		(3,329)		(3,329)

European Investments

At June 30, 2023, we owned 63,924,148 shares, or approximately 22.4%, of Klépierre, which had a quoted market price of $24.73 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 Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Total revenues	$	351,419	$	381,711	$	673,976	$	675,060
Operating income before other items		214,117		232,982		319,425		308,878
Consolidated net income		91,580		180,469		174,300		226,885
Our share of net income		9,996		22,282		27,854		33,788
Amortization of excess investment		(3,301)		(3,237)		(6,554)		(6,032)

During the three and six months ended June 30, 2023, Klépierre completed the disposal of its interest in certain shopping centers and we recorded a loss of $9.3 million. This transaction is included in loss 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.

We have an interest in a European investee that had interests in 12 Designer Outlet properties as of June 30, 2023 and 11 Designer Outlet properties as of  December 31, 2022. Eight of these Designer Outlet properties are consolidated by us as of June 30, 2023. As of June 30, 2023, our legal percentage ownership interests in these properties ranged from 23% 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 June 30, 2023 and December 31, 2022, 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 $209.9 million and $206.3 million as of June 30, 2023 and December 31, 2022, 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 $198.3 million and $199.5 million as of June 30, 2023 and December 31, 2022, 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

	June 30,		December 31,
	2023		2022
Assets:
Investment properties, at cost	$	19,293,420	$	19,256,108
Less - accumulated depreciation		8,693,057		8,490,990
		10,600,363		10,765,118
Cash and cash equivalents		1,294,306		1,445,353
Tenant receivables and accrued revenue, net		485,163		546,025
Right-of-use assets, net		129,451		143,526
Deferred costs and other assets		586,802		482,375
Total assets	$	13,096,085	$	13,382,397
Liabilities and Partners’ Deficit:
Mortgages	$	14,527,052	$	14,569,921
Accounts payable, accrued expenses, intangibles, and deferred revenue		922,028		961,984
Lease liabilities		118,914		133,096
Other liabilities		397,007		446,064
Total liabilities		15,965,001		16,111,065
Preferred units		67,450		67,450
Partners’ deficit		(2,936,366)		(2,796,118)
Total liabilities and partners’ deficit	$	13,096,085	$	13,382,397
Our Share of:
Partners’ deficit	$	(1,283,776)	$	(1,232,086)
Add: Excess Investment		1,198,669		1,219,117
Our net (deficit) Investment in unconsolidated entities, at equity	$	(85,107)	$	(12,969)

“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 Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
REVENUE:
Lease income	$	733,761	$	714,215	$	1,468,809	$	1,431,985
Other income		138,193		73,506		228,239		186,090
Total revenue		871,954		787,721		1,697,048		1,618,075
OPERATING EXPENSES:
Property operating		155,036		142,697		309,958		292,212
Depreciation and amortization		159,329		164,913		323,802		335,474
Real estate taxes		64,939		63,365		128,943		128,689
Repairs and maintenance		17,643		19,209		36,418		40,690
Advertising and promotion		18,804		16,247		39,514		35,565
Other		63,208		47,867		116,516		96,710
Total operating expenses		478,959		454,298		955,151		929,340
Operating Income Before Other Items		392,995		333,423		741,897		688,735
Interest expense		(167,498)		(147,587)		(335,706)		(292,038)
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		1,134		—		1,134		—
Net Income	$	226,631	$	185,836	$	407,325	$	396,697
Third-Party Investors’ Share of Net Income	$	114,808	$	93,041	$	205,067	$	197,697
Our Share of Net Income		111,823		92,795		202,258		199,000
Amortization of Excess Investment		(14,928)		(15,086)		(29,848)		(30,225)
Our Share of Gain on Sale or Disposal of, or Recovery on, Assets and Interests in Unconsolidated Entities, net		(454)		—		(454)		—
Income from Unconsolidated Entities	$	96,441	$	77,709	$	171,956	$	168,775

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.