Investments in Unconsolidated Entities and International Investments

3 Months Ended

Mar. 31, 2024

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 80 properties as of March 31, 2024.

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 loans. As of March 31, 2024 and December 31, 2023, we had construction loans and other advances to these related parties totaling $89.8 million and $98.0 million, respectively, which are included in deferred costs and other assets in the accompanying consolidated balance sheets.

During the third quarter of 2023, we disposed of our interest in one unconsolidated property through foreclosure in satisfaction of the $114.8 million non-recourse mortgage loan.  We recognized no gain or loss in connection with this disposal.

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

On September 7, 2023, we acquired an additional 4% ownership in TRG for approximately $199.6 million by issuing 1,725,000 units in the Operating Partnership, bringing our noncontrolling ownership interest in TRG to 84%. Substantially all our investment has been determined to relate to investment property. 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
	March 31,
	2024		2023
Total revenues	$	177,425	$	169,728
Operating income before other items		73,952		74,778
Consolidated net income		124,926		44,953
Our share of net income		104,790		34,848
Amortization of excess investment		(105,576)		(47,390)

Other Platform Investments

As of March 31, 2024, we own a 41.67% noncontrolling interest in J.C. Penney, a department store retailer. We also own a 33.3% noncontrolling interest in SPARC Group. During the quarter, we and a partner funded a loan to SPARC Group, our share of which was $100.0 million, which constituted a reconsideration event and the resulting determination that SPARC Group is a VIE.  As we do not have power to direct the activities that most significantly impact the economic performance of SPARC Group, we are not the primary beneficiary and continue to account for our investment under the equity method.  The carrying amount of our investment in this joint venture was $94.4 million and $169.2 million as of March 31, 2024 and December 31, 2023, respectively, and is included in Investment in other unconsolidated entities, at equity in the consolidated balance sheets.  Our maximum exposure to loss is the carrying value of our investment, our share of the loan receivable which is included in Deferred costs and other assets in the consolidated balance sheet, and a guarantee we have provided to SPARC Group’s lenders of $50.0 million.

During the third quarter of 2023, SPARC Group issued equity to a third party resulting in the dilution of our ownership to approximately 33.3% 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 $145.8 million. In connection with this transaction, we recorded deferred taxes of $36.9 million.

During the first quarter of 2024, we sold all of our remaining interest in Authentic Brands Group, or ABG, for cash proceeds of $1.2 billion, resulting in a pre-tax gain of $414.8 million, which is included in gain on disposal, exchange, or revaluation of equity interests, net, in the consolidated statement of operations. In connection with this transaction, we recorded tax expense of $103.7 million, which is included in income and other tax expense in the consolidated statement of operations and comprehensive income.

During the fourth quarter of 2023, we sold a portion of our interest in ABG, for cash proceeds of $300.2 million, resulting in a pre-tax gain of $157.1 million. In connection with this transaction, we recorded tax expense of $39.3 million. Concurrently, ABG completed a capital transaction resulting in the dilution of our ownership to approximately 9.6% 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 $10.3 million. In connection with this transaction, we recorded deferred taxes of $2.6 million.

During the third quarter of 2023, ABG completed a capital transaction resulting in the dilution of our ownership to approximately 11.7% 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 $12.4 million. In connection with this transaction, we recorded deferred taxes of $3.1 million.

During the second quarter of 2023, ABG completed a capital transaction resulting in a dilution of our ownership 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. In connection with this transaction, we recorded deferred taxes of $9.1 million.  

As of March 31, 2024, we own a 45% noncontrolling interest in Rue Gilt Groupe and a 50% noncontrolling legal ownership interest in Jamestown.

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

	For the Three Months Ended
	March 31,
	2024		2023
Total revenues	$	2,757,083	$	2,956,722
Operating loss before other items		(237,072)		(17,869)
Consolidated net loss		(320,674)		(118,966)
Our share of net loss		(87,046)		(37,789)
Amortization of excess investment		(692)		(1,665)

European Investments

At March 31, 2024, we owned 63,924,148 shares, or approximately 22.4%, of Klépierre, which had a quoted market price of $25.90 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
	March 31,
	2024		2023
Total revenues	$	330,606	$	322,557
Operating income before other items		128,597		105,308
Consolidated net income		103,561		82,719
Our share of net income		18,913		17,858
Amortization of excess investment		(3,276)		(3,253)

We have an interest in a European investee that had interests in 12 Designer Outlet properties as of March 31, 2024 and December 31, 2023, eight of which are consolidated by us as of March 31, 2024. As of March 31, 2024, 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 March 31, 2024 and December 31, 2023, 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 $236.0 million and $231.2 million as of March 31, 2024 and December 31, 2023, 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 $203.7 million and $200.6 million as of March 31, 2024 and December 31, 2023, 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

	March 31,		December 31,
	2024		2023
Assets:
Investment properties, at cost	$	19,151,115	$	19,315,578
Less - accumulated depreciation		8,859,314		8,874,745
		10,291,801		10,440,833
Cash and cash equivalents		1,331,870		1,372,377
Tenant receivables and accrued revenue, net		458,425		505,933
Right-of-use assets, net		117,569		126,539
Deferred costs and other assets		568,838		537,943
Total assets	$	12,768,503	$	12,983,625
Liabilities and Partners’ Deficit:
Mortgages	$	14,056,723	$	14,282,839
Accounts payable, accrued expenses, intangibles, and deferred revenue		956,184		1,032,217
Lease liabilities		107,873		116,535
Other liabilities		363,647		368,582
Total liabilities		15,484,427		15,800,173
Preferred units		67,450		67,450
Partners’ deficit		(2,783,374)		(2,883,998)
Total liabilities and partners’ deficit	$	12,768,503	$	12,983,625
Our Share of:
Partners’ deficit	$	(1,195,321)	$	(1,258,809)
Add: Excess Investment		1,140,083		1,173,852
Our net (deficit) Investment in unconsolidated entities, at equity	$	(55,238)	$	(84,957)

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,
	2024		2023
REVENUE:
Lease income	$	752,030	$	735,048
Other income		90,992		90,046
Total revenue		843,022		825,094
OPERATING EXPENSES:
Property operating		161,044		154,922
Depreciation and amortization		159,815		164,473
Real estate taxes		63,180		64,004
Repairs and maintenance		19,492		18,774
Advertising and promotion		21,663		20,710
Other		54,881		53,310
Total operating expenses		480,075		476,193
Operating Income Before Other Items		362,947		348,901
Interest expense		(176,751)		(168,206)
Net Income	$	186,196	$	180,695
Third-Party Investors’ Share of Net Income	$	94,370	$	90,259
Our Share of Net Income		91,826		90,436
Amortization of Excess Investment		(14,697)		(14,921)
Income from Unconsolidated Entities	$	77,129	$	75,515

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.