Investments in Unconsolidated Entities and International Investments

3 Months Ended

Mar. 31, 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 84 properties as of March 31, 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 March 31, 2022 and December 31, 2021, we had construction loans and other advances to these related parties totaling $131.7 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 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 the intellectual property licensing ventures less costs to sell. 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 March 31, 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 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. Our share of net losses was ($18.5 million) for the three months ended March 31, 2022 and ($24.8 million) for the three months ended March 31, 2021, which includes amortization of our excess investment of $49.0 million and $31.6 million, for the same periods. 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. TRG’s total revenue, operating income before other items and consolidated net income were approximately $162.6 million, $61.9 million, and $38.7 million, respectively, for the three months ended March 31, 2022 and $135.4 million, $36.8 million, and $8.7 million, respectively, for the three months ended March 31, 2021, before consideration of the amortization of our excess investment.

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 March 31, 2022, our noncontrolling equity method interests in SPARC Group was 50.0%.  

European Investments

At March 31, 2022, we owned 63,924,148 shares, or approximately 22.4%, of Klépierre, which had a quoted market price of $26.88 per share. Our share of net income (loss), net of amortization of our excess investment, was $8.7 million and ($7.8 million) for the three months ended March 31, 2022 and 2021, 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 (loss) were approximately $293.3 million, $75.9 million and $46.4 million, respectively, for the three months ended March 31, 2022 and $277.8 million, $51.0 million and ($15.2 million), respectively, for the three months ended March 31, 2021.

We have an interest in a European investee that had interests in 11 Designer Outlet properties as of March 31, 2022 and December 31, 2021, seven of which are consolidated by us as of March 31, 2022. As of March 31, 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, requiring a remeasurement of our previously held equity interest 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 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. 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 March 31, 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 $209.7 million and $206.1 million as of March 31, 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 $199.9 million and $194.9 million as of March 31, 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.

COMBINED BALANCE SHEETS

	March 31,		December 31,
	2022		2021
Assets:
Investment properties, at cost	$	19,533,151	$	19,724,242
Less - accumulated depreciation		8,255,410		8,330,891
		11,277,741		11,393,351
Cash and cash equivalents		1,392,710		1,481,287
Tenant receivables and accrued revenue, net		517,657		591,369
Right-of-use assets, net		161,471		154,561
Deferred costs and other assets		369,541		394,691
Total assets	$	13,719,120	$	14,015,259
Liabilities and Partners’ Deficit:
Mortgages	$	15,075,434	$	15,223,710
Accounts payable, accrued expenses, intangibles, and deferred revenue		823,553		995,392
Lease liabilities		149,194		158,372
Other liabilities		414,084		383,018
Total liabilities		16,462,265		16,760,492
Preferred units		67,450		67,450
Partners’ deficit		(2,810,595)		(2,812,683)
Total liabilities and partners’ deficit	$	13,719,120	$	14,015,259
Our Share of:
Partners’ deficit	$	(1,260,901)	$	(1,207,396)
Add: Excess Investment		1,267,144		1,283,645
Our net Investment in unconsolidated entities, at equity	$	6,243	$	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
	March 31,
	2022		2021
REVENUE:
Lease income	$	717,768	$	652,754
Other income		112,585		72,599
Total revenue		830,353		725,353
OPERATING EXPENSES:
Property operating		149,515		133,037
Depreciation and amortization		170,562		171,154
Real estate taxes		65,324		68,897
Repairs and maintenance		21,481		19,046
Advertising and promotion		19,318		19,444
Other		48,843		31,988
Total operating expenses		475,043		443,566
Operating Income Before Other Items		355,310		281,787
Interest expense		(144,448)		(146,196)
Net Income	$	210,862	$	135,591
Third-Party Investors’ Share of Net Income	$	104,657	$	68,141
Our Share of Net Income		106,205		67,450
Amortization of Excess Investment		(15,139)		(19,327)
Income from Unconsolidated Entities	$	91,066	$	48,123

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, 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 (loss) 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.