Seeing Through the Mills Mess

From 1994 to the end of 2004, KanAm invested $1 billion in equity in Mills' development projects. "One of the more beautiful things about Mills has been this KanAm stake," says Dean Frankel, a portfolio manager with Urdang Securities Management, which owns Mills shares but sold a significant amount of the stock last year.

In the late 1990s, the relationship was particularly helpful because it allowed Mills to raise funds without issuing equity and creating dilution, Frankel says.

One of the worries now is whether this relationship has been tarnished for the long term and KanAm will look to pull out its equity. The issue could put a damper on the high-profile Meadowlands Xanadu development. The project, which has begun construction and is slated to open in late 2007, is supposed to comprise 2.2 million square feet of retail shops, along with a roller coaster, an indoor ski park and other entertainment offerings.

KanAm has committed $400 million to the $1.2 billion project. "What if there is a forced liquidation there?" Frankel asks. "Mills doesn't have the equity right now" to pay off KanAm, he says.

Frankel, though, expects the Meadowlands project to be completed and create value. He says Simon Property(SPG Quote) and General Growth Properties (GGP Quote) could be interested in buying the property if Mills were forced to sell.

Many of the REIT's joint ventures with KanAm require Mills to buy out KanAm's equity position if certain conditions aren't met -- one of which is not securing construction loans by a certain date. Mills still hasn't announced whether it has received a construction loan for the Meadowlands project.

The KanAm issue only adds to the numerous question marks surrounding Mills. Investors continue to hammer the stock. Mills shares hit a 52-week low of $36.38 in intraday trading Thursday, and closed the day at $37.66, down $1.79, or 4.5%. Shares are well off their 52-week high of $66.44, reached last summer.