5. Investment in Unconsolidated Entities

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 76 properties as of September 30, 2016.

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, 2016 and December 31, 2015, we had construction loans and other advances to related parties totaling $13.0 million and $13.9 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

Unconsolidated Entity Transactions

On September 15, 2016, we and our partners, through two separate joint ventures, acquired certain assets and liabilities of Aéropostale, a retailer of apparel and accessories, out of bankruptcy. Our noncontrolling interest in the retail operations venture and in the licensing venture is 49.05% and 28.45%, respectively. Our aggregate investment in the ventures was $33.1 million, which includes our share of working capital funded into the retail business.

On April 14, 2016, we and a joint venture partner completed the acquisition of The Shops at Crystals, a 262,000 square foot luxury shopping center on the Las Vegas Strip, for $1.1 billion. The transaction was funded with a combination of cash on hand, cash from our partner, and a $550.0 million 3.74% fixed-rate mortgage financing that will mature on July 1, 2026. We have a 50% noncontrolling interest in this joint venture and will manage the day-to-day operations. Substantially all the difference between the cost of our investment and our share of the underlying equity of the property has been determined to relate to investment property based on estimated fair values at the acquisition date.

On April 5, 2016, Quaker Bridge Mall, in which we own a 50% noncontrolling interest, completed a $180.0 million mortgage financing with a fixed interest rate of 4.50% that matures on May 1, 2026. Proceeds of approximately $180.0 million from the financing were distributed to the joint venture partners in April 2016.

On July 22, 2015, we closed on our previously announced transaction with Hudson’s Bay Company, or HBC, to which HBC contributed 42 properties in the U.S. and we committed to contribute $100.0 million for improvements to the properties contributed by HBC in exchange for a noncontrolling interest in the newly formed entity, HBS. As of September 30, 2016, we have funded $19.1 million of this commitment. On September 30, 2015, HBC announced it had closed on the acquisition of Galeria Holding, the parent company of Germany’s leading department store, Kaufhof. In conjunction with the closing, HBS acquired 41 Kaufhof properties in Germany from HBC. All of these properties have been leased to affiliates of HBC. We contributed an additional $178.5 million to HBS upon closing of the Galeria Holding transaction. Our noncontrolling equity interest in HBS is approximately 9.7% at September 30, 2016. Our share of net income, net of amortization of our excess investment, was $4.7 million and $12.6 million for the three and nine months ended September 30, 2016, respectively. Total assets and total liabilities of HBS as of September 30, 2016 were $4.3 billion and $2.9 billion, respectively, and total revenues, operating income and consolidated net income were approximately $265.2 million, $175.1 million, and $107.0 million, respectively, for the nine months ended September 30, 2016.

On April 13, 2015, we announced a joint venture with Sears Holdings, or Sears, whereby Sears contributed 10 of its properties located at our malls to the joint venture in exchange for a 50% noncontrolling interest in the joint venture. We contributed $114.0 million in cash in exchange for a 50% noncontrolling interest in the joint venture. Sears or its affiliates are leasing back each of the 10 properties from the joint venture. The joint venture has the right to recapture not less than 50% of the space leased to Sears to be used for purposes of redeveloping and releasing the recaptured space. We will provide development, leasing and management services to the joint venture for any recaptured space. On July 7, 2015, we separately invested approximately $33.0 million in exchange for 1,125,760 common shares of Seritage Growth Properties, or Seritage, a public REIT formed by Sears, which we account for as an available-for-sale security. Seritage now holds Sears’ interest in the joint venture.

European Investments

At September 30, 2016, we owned 63,924,148 shares, or approximately 20.3%, of Klépierre, which had a quoted market price of $45.78 per share. On July 29, 2014, Klépierre announced that it had entered into a conditional agreement to acquire Corio N.V., or Corio, pursuant to which Corio shareholders received 1.14 Klépierre ordinary shares for each Corio ordinary share. On January 15, 2015, the tender offer transaction closed and the merger was completed on March 31, 2015, reducing our ownership from 28.9% at December 31, 2014 to 18.3% resulting in a non-cash gain of $206.9 million for the first quarter of 2015 as if we had sold a proportionate share of our investment. On May 11, 2015, we purchased 6,290,000 additional shares of Klépierre for $279.4 million bringing our ownership to 20.3%. All of the excess investment related to this additional purchase has been determined to relate to investment property. Our share of net income (loss), net of amortization of our excess investment, was $5.5 million and ($3.4) million for the three months ended September 30, 2016 and 2015, respectively, and $24.1 million and $6.2 million for the nine months ended September 30, 2016 and 2015, 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, $324.5 million and $157.7 million, respectively, for the nine months ended September 30, 2016 and $1.1 billion, $345.4 million and $139.7 million, respectively, for the nine months ended September 30, 2015.

We have an interest in a European entity that had interests in six Designer Outlet properties as of December 31, 2015. As of March 31, 2016, our legal percentage ownership interests in these entities ranged from 45% to 90%. We obtained control of the entity requiring a remeasurement of our previously held equity interest to fair value and a corresponding non-cash gain of $12.1 million in earnings during the first quarter of 2016, which includes amounts reclassified from accumulated other comprehensive income (loss) related to the currency translation adjustment previously recorded on our investment. The gain is included in gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income. As a result of the change in control, we consolidated two of the six outlet properties on January 1, 2016. The consolidation required us to recognize the entity's identifiable assets and liabilities at fair value in our consolidated financial statements along with the related redeemable noncontrolling interest representing our partners' share. The fair value of the consolidated assets and liabilities relates primarily to investment property, investments in unconsolidated entities and assumed mortgage debt. Due to certain redemption rights held by our venture partner, the noncontrolling interest is presented on the accompanying Simon consolidated balance sheet outside of equity in limited partners’ preferred interest in the Operating Partnership and noncontrolling redeemable interests in properties and in the accompanying Operating Partnership consolidated balance sheet in preferred units, various series, at liquidation value, and noncontrolling redeemable interests in properties. In February 2016, we and our partner, through this European entity, acquired a noncontrolling 75.0% ownership interest in an outlet center in Ochtrup, Germany for cash consideration of approximately $38.3 million.

On July 25, 2016, this European entity also acquired the remaining 33% interest in two Italian outlet centers in Naples and Venice, as well as the remaining interests in related expansion projects and working capital for cash consideration of €145.5 million. This resulted in the consolidation of these two properties on the acquisition date requiring a remeasurement of our previously held equity interest to fair value and the recognition of a non-cash gain of $29.3 million in earnings during the third quarter of 2016. The gain is included in gain upon acquisition of controlling interests and sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income. The preliminary allocation of fair value of the consolidated assets and liabilities consists primarily of investment property and lease related intangibles and will be completed within the one-year time period.

In addition, we have a noncontrolling interest in a European property management and development company that provides services to 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 have a direct minority ownership in three of those outlets. Our investment in these entities is accounted for under the cost method. At both September 30, 2016 and December 31, 2015, the carrying value of these non-marketable investments was $115.4 million and is included in deferred costs and other assets.

On March 19, 2015, we disposed of our interest in a joint venture which had held interests in rights to pre-development projects in Europe, for total proceeds of $19.0 million. We recognized a gain on the sale of $8.3 million, which is included in other income in the accompanying consolidated statements of operations and comprehensive income.

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 $255.4 million and $224.6 million as of September 30, 2016 and December 31, 2015, 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 $126.3 million and $117.0 million as of September 30, 2016 and December 31, 2015, 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, our investment in Aéropostale, and HBS follows.

BALANCE SHEETS


	September 30,		December 31,
	2016		2015
Assets:
Investment properties, at cost	$	17,500,339	$	17,186,884
Less - accumulated depreciation		5,890,642		5,780,261
		11,609,697		11,406,623
Cash and cash equivalents		787,140		818,805
Tenant receivables and accrued revenue, net		339,807		354,133
Deferred costs and other assets		356,659		482,024
Total assets	$	13,093,303	$	13,061,585
Liabilities and Partners’ Deficit:
Mortgages	$	14,117,650	$	13,827,215
Accounts payable, accrued expenses, intangibles, and deferred revenue		871,497		985,159
Other liabilities		384,632		468,005
Total liabilities		15,373,779		15,280,379
Preferred units		67,450		67,450
Partners’ deficit		(2,347,926)		(2,286,244)
Total liabilities and partners’ deficit	$	13,093,303	$	13,061,585
Our Share of:
Partners’ deficit	$	(990,453)	$	(854,562)
Add: Excess Investment		1,828,949		1,788,749
Our net Investment in unconsolidated entities, at equity	$	838,496	$	934,187

“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 is allocated on a fair value basis primarily to investment property, lease related intangibles, and debt premiums and discounts. We amortize excess investment over the life of the related depreciable components of investment property, typically no greater than 40 years, the terms of the applicable leases and the applicable debt maturity, respectively. The amortization is included in the reported amount of income from unconsolidated entities.

STATEMENT OF OPERATIONS


	For The Three				For The Nine
	Months Ended				Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
REVENUE:
Minimum rent	$	454,315	$	447,790	$	1,351,429	$	1,325,056
Overage rent		45,064		43,669		141,591		136,191
Tenant reimbursements		222,788		203,832		645,994		597,461
Other income		55,558		55,060		169,044		170,600
Total revenue		777,725		750,351		2,308,058		2,229,308
OPERATING EXPENSES:
Property operating		139,224		135,467		401,718		398,528
Depreciation and amortization		153,420		145,351		434,620		435,615
Real estate taxes		60,853		57,767		181,790		172,818
Repairs and maintenance		17,795		15,919		56,029		53,365
Advertising and promotion		18,884		20,395		62,190		54,485
(Recovery of) Provision for credit losses		(133)		(212)		5,441		2,937
Other		44,972		38,861		133,652		122,214
Total operating expenses		435,015		413,548		1,275,440		1,239,962
Operating Income		342,710		336,803		1,032,618		989,346
Interest expense		(149,704)		(147,333)		(444,485)		(443,396)
Gain on sale or disposal of assets and interests in unconsolidated entities, net		40,529		—		101,051		35,779
Net Income	$	233,535	$	189,470	$	689,184	$	581,729
Third-Party Investors’ Share of Net Income	$	118,291	$	95,018	$	337,491	$	296,896
Our Share of Net Income		115,244		94,452		351,693		284,833
Amortization of Excess Investment		(21,901)		(22,884)		(70,671)		(71,426)
Our Share of Gain on Sale or Disposal of Assets and Interests in Unconsolidated Entities, net		(20,149)		—		(22,636)		(16,339)
Our Share of Gain on Sale or Disposal of Assets and Interests Included in Other Income in the Consolidated Financial Statements		—		—		(36,153)		—
Income from Unconsolidated Entities	$	73,194	$	71,568	$	222,233	$	197,068

Our share of income from unconsolidated entities in the above table, aggregated with our share of the results of Klépierre, our investment in Aéropostale, 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 assets and interests in unconsolidated entities, net is reflected within gain upon acquisition of controlling interests, sale or disposal of assets and interests in unconsolidated entities, net in the accompanying consolidated statements of operations and comprehensive income.