Seeing Through the Mills Mess

Mills Corp.(MLS Quote) was once regarded as one of the best mall developers in the country and one of strongest value-creators in the REIT universe.

Now, the company is better known as a financial mess. But for long-term investors with iron stomachs, analysts say the stock could be a nice value play.

Mills, which is developing the giant Xanadu project in New Jersey's Meadowlands, earlier this month spooked investors when it pulled the plug on 10 development projects, laid off 19 executives to cut costs, and said it would restate its earnings going back five years.

On Wednesday, the latest dire news came from Germany, where Mills' key equity partner, KanAm, said it froze the assets in two of its open-ended property funds for three months. KanAm said investors had been pulling out money because of the negative press reports about Mills' financial restatements.

The first KanAm fund, US-Grundinvest Fonds, froze its $579 million in assets to avoid breaching a 5% minimum liquidity threshold after $50 million of investor outflows, according to Legg Mason analyst David Fick, who downgraded Mills to hold from buy Thursday.

The frozen KanAm fund is invested directly in two Mills mall projects: Opry Mills in Nashville and the Great Mall of the Bay Area in Milpitas, Calif. As of Dec. 31, 2004, KanAm held 50% equity stakes in each project. KanAm can force an outright sale of the two Mills assets, according to Mills filings with the Securities and Exchange Commission. However, if Mills wants to buy out KanAm's interest, it may have trouble accessing capital due to its financial problems, Fick adds.

The KanAm issue will continue to be a dark cloud over Mills in the near term. KanAm was a founding partner of the Arlington, Va., company, and the German investment firm's closed-end funds, which have not been frozen, were significant equity investors in 10 other Mills projects. KanAm also effectively owned 1.23% of Mills' operating partnership units (as of Dec. 31, 2004), which can be converted into Mills' common stock or the cash value of the stock.