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Investments in and Advances to Joint Ventures | 9 Months Ended
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Sep. 30, 2017
Equity Method Investments And Joint Ventures [Abstract] |
Investments in and Advances to Joint Ventures |
2. | Investments in and Advances to Joint Ventures
At September 30, 2017 and December 31, 2016, the Company had ownership interests in various unconsolidated joint ventures that had an investment in 142 and 151 shopping center properties, respectively. Condensed combined financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):
| September 30, 2017 |  |  | December 31, 2016 |
Condensed Combined Balance Sheets |  |  |  |  |  |  |
Land | $ | 1,250,276 |  |  | $ | 1,287,675 |
Buildings |  | 3,238,956 |  |  |  | 3,376,720 |
Fixtures and tenant improvements |  | 212,529 |  |  |  | 203,824 |
|  | 4,701,761 |  |  |  | 4,868,219 |
Less: Accumulated depreciation |  | (957,207 | ) |  |  | (884,356 | )
|  | 3,744,554 |  |  |  | 3,983,863 |
Construction in progress and land |  | 56,381 |  |  |  | 56,983 |
Real estate, net |  | 3,800,935 |  |  |  | 4,040,846 |
Cash and restricted cash |  | 117,211 |  |  |  | 50,378 |
Receivables, net |  | 53,199 |  |  |  | 50,685 |
Other assets, net |  | 205,436 |  |  |  | 248,664 |
| $ | 4,176,781 |  |  | $ | 4,390,573 |
Mortgage debt | $ | 2,698,105 |  |  | $ | 3,034,399 |
Notes and accrued interest payable to the Company |  | 2,626 |  |  |  | 1,584 |
Other liabilities |  | 195,817 |  |  |  | 206,949 |
|  | 2,896,548 |  |  |  | 3,242,932 |
Redeemable preferred equity – DDR |  | 392,479 |  |  |  | 393,338 |
Accumulated equity |  | 887,754 |  |  |  | 754,303 |
| $ | 4,176,781 |  |  | $ | 4,390,573 |
Company's share of accumulated equity | $ | 134,001 |  |  | $ | 97,977 |
Redeemable preferred equity, net |  | 327,309 |  |  |  | 393,338 |
Basis differentials |  | (26,103 | ) |  |  | (36,117 | )
Deferred development fees, net of portion related to the Company's interest |  | (2,881 | ) |  |  | (2,651 | )
Amounts payable to the Company |  | 2,626 |  |  |  | 1,584 |
Investments in and Advances to Joint Ventures, net | $ | 434,952 |  |  | $ | 454,131 |
| Three Months |  |  | Nine Months |
| Ended September 30, |  |  | Ended September 30, |
| 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Condensed Combined Statements of Operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Revenues from operations | $ | 126,992 |  |  | $ | 127,676 |  |  | $ | 380,568 |  |  | $ | 384,476 |
Expenses from operations: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Operating expenses |  | 36,041 |  |  |  | 35,547 |  |  |  | 110,400 |  |  |  | 110,176 |
Impairment charges |  | 2,160 |  |  |  | 13,598 |  |  |  | 82,667 |  |  |  | 13,598 |
Depreciation and amortization |  | 45,291 |  |  |  | 47,955 |  |  |  | 137,976 |  |  |  | 146,011 |
Interest expense |  | 24,276 |  |  |  | 33,567 |  |  |  | 83,410 |  |  |  | 100,208 |
Preferred share expense |  | 8,307 |  |  |  | 8,438 |  |  |  | 24,674 |  |  |  | 25,007 |
Other (income) expense, net |  | 6,577 |  |  |  | 5,829 |  |  |  | 22,204 |  |  |  | 17,959 |
|  | 122,652 |  |  |  | 144,934 |  |  |  | 461,331 |  |  |  | 412,959 |
Income (loss) from continuing operations |  | 4,340 |  |  |  | (17,258 | ) |  |  | (80,763 | ) |  |  | (28,483 | )
Gain on disposition of real estate, net |  | 31,740 |  |  |  | 658 |  |  |  | 30,764 |  |  |  | 54,255 |
Net income (loss) attributable to unconsolidated joint ventures | $ | 36,080 |  |  | $ | (16,600 | ) |  | $ | (49,999 | ) |  | $ | 25,772 |
Company's share of equity in net income (loss) of joint ventures | $ | 3,819 |  |  | $ | (1,755 | ) |  | $ | (2,570 | ) |  | $ | 10,336 |
Basis differential adjustments(A) |  | 992 |  |  |  | 298 |  |  |  | 4,999 |  |  |  | 3,745 |
Equity in net income (loss) of joint ventures | $ | 4,811 |  |  | $ | (1,457 | ) |  | $ | 2,429 |  |  | $ | 14,081 |
(A) | The difference between the Company’s share of net income (loss), as reported above, and the amounts included in the Company’s consolidated statements of operations is attributable to the amortization of basis differentials, unrecognized preferred PIK, the recognition of deferred gains, differences in gain (loss) on sale of certain assets recognized due to the basis differentials and other than temporary impairment charges.
Service fees and income earned by the Company through management, financing, leasing and development activities performed related to all of the Company’s unconsolidated joint ventures are as follows (in millions):
| Three Months |  |  | Nine Months |
| Ended September 30, |  |  | Ended September 30, |
| 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
Management and other fees | $ | 5.3 |  |  | $ | 6.3 |  |  | $ | 18.9 |  |  | $ | 22.2 |
Interest income |  | 6.3 |  |  |  | 8.4 |  |  |  | 20.1 |  |  |  | 25.0 |
Development fees and leasing commissions |  | 1.8 |  |  |  | 2.2 |  |  |  | 6.2 |  |  |  | 5.9 |
The Company’s joint venture agreements generally include provisions whereby each partner has the right to trigger a purchase or sale of its interest in the joint venture or to initiate a purchase or sale of the properties after a certain number of years or if either party is in default of the joint venture agreements. The Company is not obligated to purchase the interests of its outside joint venture partners under these provisions. BRE DDR Retail Holdings Joint Ventures The Company’s two unconsolidated investments with The Blackstone Group L.P. (“Blackstone”), BRE DDR Retail Holdings III (“BRE DDR III”) and BRE DDR Retail Holdings IV (“BRE DDR IV” and, together with BRE DDR III, the “BRE DDR Joint Ventures”), have substantially similar terms and are summarized as follows (in millions, except properties owned):
|  |  | Common Equity |  |  | Preferred Investment (Principal) |  |  | Properties Owned |
| Formation |  | Initial |  |  | Initial |  |  | September 30, 2017 |  |  | Net of Reserve |  |  | Inception |  |  | September 30, 2017 |
BRE DDR III | Oct 2014 |  | $ | 19.6 |  |  | $ | 300.0 |  |  | $ | 314.5 |  |  | $ | 262.7 |  |  |  | 70 |  |  |  | 42 |
BRE DDR IV | Dec 2015 |  |  | 12.9 |  |  |  | 82.6 |  |  |  | 67.1 |  |  |  | 58.3 |  |  |  | 6 |  |  |  | 6 |
|  |  |  |  |  |  | $ | 382.6 |  |  | $ | 381.6 |  |  | $ | 321.0 |  |  |  |  |  |  |  |  |
An affiliate of Blackstone is the managing member and effectively owns 95% of the common equity of each of the two BRE DDR Joint Ventures, and consolidated affiliates of DDR effectively own the remaining 5%. The Company provides leasing and property management services to all of the joint venture properties. The Company cannot be removed as the property and leasing manager until the preferred equity, as discussed below, is redeemed in full (except for certain specified events). The Company’s preferred interests are entitled to certain preferential cumulative distributions payable out of operating cash flows and certain capital proceeds pursuant to the terms and conditions of the preferred investments. The preferred distributions are recognized as Interest Income within the Company’s consolidated statements of operations and are classified as a note receivable in Investments in and Advances to Joint Ventures on the Company’s consolidated balance sheets. Blackstone has the right to defer up to 23.5% of the preferred fixed distributions as a payment in kind distribution or “PIK.” The preferred investments have an annual distribution rate of 8.5% including any deferred and unpaid preferred distributions. Blackstone has made this PIK deferral election since the formation of both joint ventures. The cash portion of the preferred fixed distributions is generally payable first out of operating cash flows and is current for both BRE DDR Joint Ventures. The Company has no expectation that the cash portion of the preferred fixed distribution will become impaired. The unpaid preferred investment (and any accrued distributions) is payable (1) at Blackstone’s option, in whole or in part, subject to early redemption premiums in certain circumstances during the first three years of the joint ventures; (2) at varying equity sharing levels with the common members under certain circumstances including specified financial covenants, upon a sale of properties over a certain threshold; (3) at DDR’s option after seven years (2021 for BRE DDR III and 2022 for BRE DDR IV); and (4) upon the incurrence of additional indebtedness by the joint ventures in excess of a certain threshold. Specifically, for BRE DDR III as of September 30, 2017, based upon the cumulative asset sales, net asset sale proceeds will be allocated at 51.9% to the preferred member. For BRE DDR IV, the preferred investment is collateralized by assets in which DDR has a 5% common equity interest for 95% of the value and by an additional three assets in which DDR has a nominal interest. The repayment of the BRE DDR IV preferred investment prior to 2022 is first subject to a remaining minimum net asset sales threshold of $4.9 million, of which $1.1 million is allocated to the preferred member. The net asset sale proceeds generated thereafter are expected to be available to repay the preferred member. In the first quarter of 2017, the Company recorded a valuation allowance on each of the BRE DDR III and BRE DDR IV preferred investment interests of $70.0 million and $6.0 million, respectively, or $76.0 million in the aggregate. The valuation allowances were triggered late in the first quarter by an increase in the estimated market capitalization rates for the underlying real estate collateral of the investments. The values of open air shopping centers anchored by big box national retailers, particularly in secondary markets, have been under increasing pressure and most recently decreased due to the continued perceived threat of internet retail competition and recent tenant bankruptcies. Several large national retailers filed for bankruptcy in March and April 2017. A majority of the shopping centers collateralizing the preferred investments are those which have been most impacted by the rising capitalization rates. These factors have also reduced the number of potential investors and well-capitalized buyers for these types of assets. The managing member of the two joint ventures exercises significant influence over the timing of asset sales. Due to the Company’s expectation regarding the likely timing of asset sales, the valuation of the Company’s investments considers how management believes a third-party market participant would value the securities in the current higher capitalization rate environment. As a result, the investments were impaired to reflect the risk that the securities are not repaid in full in advance of the Company’s redemption rights in 2021 and 2022. The Company reassessed the aggregate valuation allowance at September 30, 2017, and based upon actual timing and values of recent property sales as well as current market assumptions, the Company adjusted the allowance on each of the BRE DDR III and BRE DDR IV preferred investment interests by a reduction of $18.1 million and an increase of $2.7 million, respectively, or $15.4 million in the aggregate, resulting in a net valuation allowance of $60.6 million. The valuation allowance is recorded as Reserve/Adjustment of Preferred Equity Interests on the Company’s consolidated statements of operations. The Company will continue to monitor the investments and related valuation allowance which could be increased or decreased in future periods, as appropriate. As discussed above, the preferred 8.5% distribution rate has two components, a cash interest rate of 6.5% and an accrued PIK of 2.0%. As a result of the valuation allowances recorded, effective in March 2017, the Company no longer recognizes as interest income the 2.0% PIK (aggregating $4.5 million at September 30, 2017). Although Blackstone has the right to change its payment election, the Company expects future preferred distributions to continue to include the PIK component. The recognition of the PIK interest income will be reevaluated based upon any future adjustments to the aggregate valuation allowance, as appropriate. DDRM Properties (formerly DDR Domestic Retail Fund I) In June 2017, the Company and an affiliate of Madison International Realty (“Madison”) recapitalized a joint venture with 52 shopping centers previously owned by the Company and various partners through the DDR Domestic Retail Fund I, totaling $1.05 billion. Madison International Real Estate Liquidity Fund VI, an investment fund managed by Madison, acquired 80% of the common equity and an affiliate of the Company retained its 20% interest. This ownership structure is consistent with the structure of the joint venture prior to the recapitalization. In addition, the Company will continue to provide leasing and management services. The recapitalization included the repayment of all outstanding mortgage debt previously held by the joint venture, a majority of which was scheduled to mature in July 2017. The joint venture obtained new mortgage loan financing aggregating $706.7 million (of which the Company’s pro rata share is $141.3 million) collateralized by the 52 assets with a maturity date of July 2022, including extensions. The Company contributed $46.9 million in cash to fund its pro rata share of the recapitalization and related debt refinancing. The remaining three assets not involved in the recapitalization were distributed to the existing partners of DDR Domestic Retail Fund I at the aggregate book value of $74.0 million (of which the Company’s pro rata share was $14.8 million) and contributed to a new joint venture with the same ownership structure, DDR Manatee Liquidating Holdco I. The Company retained a 20% interest in the joint venture and will continue to provide leasing and management services. The assets in the joint venture are unencumbered. Disposition of Shopping Centers From January 1, 2017 to September 30, 2017, the BRE DDR Retail Holdings III joint venture sold eight assets for an aggregate sales price of $164.3 million and recorded a gain on sale of $30.9 million. The DDRTC Core Retail Fund joint venture sold one asset for $17.7 million. The Company’s prorate share of the aggregate gain form these sales was $2.0 million.

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- Definition The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI http://asc.fasb.org/topic&trid=2196965 + Details
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