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A Post-Halloween Horror Show at Mills

Mills Corp. played the role of Michael Myers this Halloween, shocking investors and analysts by postponing its third quarter earnings report and warning that when the numbers emerge they will be "substantially below expectations."

The ominous, if vague, announcement yesterday slashed the company's stock price by 14 percent, as it dropped $7 to about $45. Analysts had been expecting the firm's FFO to be $1.06 per share. Analysts and investors were not only shocked by the surprise announcement, but several expressed anger at how the company handled the announcement -- dropping a bomb, but not providing any significant detail "The terse content is inexcusable," wrote David Fick, a REIT analyst with Legg Mason. (Fick, was formerly chief financial officer at Mills.)

JP Morgan analyst Michael Muller wrote, "At this point, we are in the dark with respect to the nature of the Q3 shortfall and the accounting issues. The best-case scenario would be a timing issue prompting a large fee or gain slipping from Q3 to Q4. ... The worst-case scenario would be another set of material accounting issues arising that further dampens credibility and negatively impacts '05, '06 and '07 growth prospects."

The latest news follows the resignation of three top executives. Three weeks ago, Mills' chief accounting officer, Michael Green, resigned effective Oct. 27 to accept a position as chief financial officer of a private Washington, D.C.-based company. A week earlier, Mills Corp. announced that Kenneth Parent, COO, would retire April 1, 2006 and Tom Frost, executive vice president, would retire on Dec. 31.

Mills Corp. did not return phone calls seeking further comment, leaving analysts and investors to speculate about the nature of the problem. Theories range from some kind of accounting problem to significant charges related to its development pipeline. Some analysts, who asked not to be identified, suggested that there might be a charge related to the ambitious Meadowlands Xanadu project in New Jersey. A recent accounting standard change requires REITs to expense ground lease costs rather than classifying them as "other assets" on its balance sheet. Mills has a $160 million pre-paid ground lease on Meadowlands Xanadu.

Several analysts downgraded the company or suspending their ratings pending more information. Some institutional investors are even preparing to bail completely, according to analyst reports. Shareholder lawsuits are also likely to crop up in the wake of whatever Mills' news may be.

While the ramifications for the company are not yet clear, investors were quick to point out that its discounted share price makes the company a potential takeover target.

Analysts estimate that its real estate holdings alone are worth $64 per share, about $20 above where the company is now trading.

Making the news particularly damning is that this is the second time this year that Mills had postponed an earnings call. In March, it postponed its 2004 earnings report by five days to adjust for accounting changes. Mills also restated 2003 earnings because of a previous accounting problem. In the first and second quarters, Mills reported $0.07 losses compared with net incomes of $1.45 per share and $0.38 per share in the same quarters in 2004.

Mills' announcement is the most frightening in the third-quarter earnings season so far, but there are other signs of weakness in retail REITs and for REITs. Several retail REITs have come in under consensus FFO projections or have posted earnings below last year's third-quarter.

General Growth Properties posted FFO of $0.72 per share, but due to depreciation and one-time costs, posted a third-quarter loss of $0.03 cents per share compared with a $0.29 cent per share profit last year. Regency Centers reported third quarter earnings of $0.41 cents per diluted share, down from $0.58 per diluted share last year. As of mid-day Wednesday, the Morgan Stanley REIT index was at 791. It's up 2.8 percent for the year--off its highs in the summer when it was up about 12 percent--and well behind 2003 and 2004 when it appreciated more than 30 percent each year.

-- David Bodamer

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