Investments in Unconsolidated Entities and International Investments

9 Months Ended

Sep. 30, 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 September 30, 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 September 30, 2024 and December 31, 2023, we had construction loans and other advances to these related parties totaling $85.7 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.

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				For the Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Total revenues	$	181,214	$	170,475	$	522,743	$	503,300
Operating income before other items		74,835		64,134		208,902		200,828
Consolidated net income (loss)		45,448		(79,515)		195,266		(8,840)
Our share of net income (loss)		37,829		(64,927)		163,408		(9,863)
Amortization of excess investment		(49,299)		28,883		(212,081)		(65,897)

Other Platform Investments

As of September 30, 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 first quarter of 2024, 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.  In the second quarter of 2024, we were reimbursed $50.0 million by a venture partner, reducing our loan receivable to $50.0 million as of June 30, 2024 and equalizing all partners’ loans to the venture. The carrying amount of our investment in this joint venture was $40.0 million and $169.2 million as of September 30, 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 loan receivable which is included in Investment in other unconsolidated entities, at equity in the consolidated balance sheets, and a guarantee we have provided to SPARC Group’s lenders of $50.0 million.

During the second quarter of 2024, we participated in the formation of a joint venture, Phoenix Retail, LLC, to acquire the Express Retail Company and operate Express and Bonobos direct-to-consumer businesses in the United States, from the previous owner on June 21, 2024, in a bankruptcy proceeding.  There was no cash consideration transferred for our 39.4% noncontrolling interest and non-cash consideration was de minimis.  

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) benefit 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 September 30, 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				For the Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
Total revenues	$	2,657,141	$	3,265,353	$	8,075,212	$	9,414,604
Operating (loss) income before other items		(74,524)		257,104		(343,127)		342,353
Consolidated net (loss) income		(109,444)		136,745		(507,154)		8,379
Share of net (loss) income, net of tax		(20,315)		11,615		(118,137)		(18,122)
Amortization of excess investment		(692)		(1,665)		(2,076)		(4,994)

European Investments

At September 30, 2024, we owned 63,924,148 shares, or approximately 22.4%, of Klépierre, which had a quoted market price of $32.86 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,
	2024		2023		2024		2023
Total revenues	$	349,975	$	321,558	$	1,040,620	$	995,534
Operating income before other items		162,437		131,041		485,937		450,466
Consolidated net income		124,455		94,035		319,002		268,335
Our share of net income		13,900		25,422		56,156		53,276
Amortization of excess investment		(3,309)		(3,300)		(11,857)		(9,855)

During the three months ended September 30, 2024, Klépierre completed the disposal of its interest in certain shopping centers and our share of the net loss was $2.7 million. For the nine months ended September 30, 2024, Klépierre has completed the disposal of its interest in certain shopping centers and our share of the net loss was $6.0 million. These transactions are included in (loss) 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 three and nine months ended September 30, 2023, Klépierre completed the disposal of its interest in certain shopping centers and our share of the loss was $9.3 million. These transactions are included in (loss) 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.

We have an interest in a European investee that had interests in 12 Designer Outlet properties as of September 30, 2024 and  December 31, 2023, eight of which are consolidated by us as of September 30, 2024. As of September 30, 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.

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 $225.2 million and $231.2 million as of September 30, 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 $201.9 million and $200.6 million as of September 30, 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

	September 30,		December 31,
	2024		2023
Assets:
Investment properties, at cost	$	19,550,692	$	19,315,578
Less - accumulated depreciation		9,183,068		8,874,745
		10,367,624		10,440,833
Cash and cash equivalents		1,260,075		1,372,377
Tenant receivables and accrued revenue, net		503,076		505,933
Right-of-use assets, net		117,035		126,539
Deferred costs and other assets		566,932		537,943
Total assets	$	12,814,742	$	12,983,625
Liabilities and Partners’ Deficit:
Mortgages	$	14,104,896	$	14,282,839
Accounts payable, accrued expenses, intangibles, and deferred revenue		974,080		1,032,217
Lease liabilities		107,418		116,535
Other liabilities		380,694		368,582
Total liabilities		15,567,088		15,800,173
Preferred units		67,450		67,450
Partners’ deficit		(2,819,796)		(2,883,998)
Total liabilities and partners’ deficit	$	12,814,742	$	12,983,625
Our Share of:
Partners’ deficit	$	(1,194,144)	$	(1,258,809)
Add: Excess Investment		1,109,624		1,173,852
Our net (deficit) Investment in unconsolidated entities, at equity	$	(84,520)	$	(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				For the Nine Months Ended
	September 30,				September 30,
	2024		2023		2024		2023
REVENUE:
Lease income	$	763,185	$	743,388	$	2,257,101	$	2,212,197
Other income		92,151		129,021		277,915		357,261
Total revenue		855,336		872,409		2,535,016		2,569,458
OPERATING EXPENSES:
Property operating		171,027		165,406		494,210		475,364
Depreciation and amortization		155,472		159,560		473,394		483,361
Real estate taxes		56,683		63,607		180,967		192,550
Repairs and maintenance		17,382		19,034		55,016		55,452
Advertising and promotion		20,098		19,188		63,292		58,702
Other		53,225		63,696		161,735		180,213
Total operating expenses		473,887		490,491		1,428,614		1,445,642
Operating Income Before Other Items		381,449		381,918		1,106,402		1,123,816
Interest expense		(176,583)		(172,523)		(532,692)		(508,230)
Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		—		19,395		—		20,529
Net Income	$	204,866	$	228,790	$	573,710	$	636,115
Third-Party Investors’ Share of Net Income	$	104,298	$	124,272	$	291,517	$	329,338
Our Share of Net Income		100,568		104,518		282,193		306,777
Amortization of Excess Investment		(14,404)		(14,933)		(43,564)		(44,781)
Our Share of Gain on sale or disposal of, or recovery on, assets and interests in unconsolidated entities, net		—		—		—		(454)
Income from Unconsolidated Entities	$	86,164	$	89,585	$	238,629	$	261,542

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 (loss) 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.