Updated from 10:24 a.m. ESTTroubled real-estate developer Mills Corp. ( MLS) is now facing a formal investigation by the Securities and Exchange Commission, and the probe could deter a possible sale of the company. The SEC's upgraded investigation, along with mounting shareholder litigation, is driving away Vornado Realty Trust's ( VNO ) interest in buying Mills, according to a person familiar with Vornado's thinking. In a filing Wednesday, Mills said the SEC informed it on March 20 that a previously informal probe had been upgraded. The SEC's interest comes as the real estate investment trust works to complete a 10-K filing that was delayed by an accounting restatement. Mills shares fell $2.11, or 7%, to $28.31 Thursday. The shares have slid from above $60 last fall as the company has coped with the restatement, shareholder suits and rising analyst skepticism. In late February, the company said it had hired a financial adviser to explore strategic alternatives, including a possible sale. "The company has fully cooperated, and intends to continue to fully cooperate, with the SEC," Mills said in a federal filing. Formalization of an SEC probe lets the agency mail subpoenas. "This news does not come as much of a surprise to us given three earnings restatements since 2003 and the news in an 8-K filing last week that additional restatements are expected," wrote Banc of America Securities analyst Ross Nussbaum in a research note. Nussbaum, who slapped a sell rating on Mills earlier this week, expects the firm to eventually cut its dividend up to 50% to free up cash in the near term. Vornado Realty, a REIT that owns several regional malls and lucrative retail real estate in New York City and the tri-state area, confirmed publicly in recent weeks that it had conducted informal talks with Mills' management about some sort of sale.
The company, however, is becoming wary of Mills' mounting problems, according to a person familiar with the thinking of Vornado President Michael Fascitelli. Mills, after wiping away more than $2 billion of shareholder equity, is facing growing shareholder litigation along with the SEC probe. Just a month ago, Vornado was exploring the idea of dividing up Mills with other real estate partners, perhaps cherry-picking some of the nicer Mills properties in the greater New York area and Florida, according to the source. But now Vornado -- along with any other REIT rumored to be interested, such as Simon Property Group ( SPG) -- faces a black-eye if it takes on Mills. With REITs trading at yields below 4%, the companies are starting to look like blue-chip stocks that are respected by Wall Street. The source familiar with the matter questions if Vornado or Simon really wants to list a troubled Mills subsidiary in its annual report. "Take away the SEC and take away shareholder litigation, and I think Vornado would have a more serious interest," the source says. A Vornado spokeswoman declined to comment. In other Mills news, Stark Investments disclosed in an SEC filing Wednesday that it recently purchased another 600,000 shares of the REIT, boosting its stake to 7.5% from 6.4%. The hedge fund is run by Brian Stark and Michael Roth and includes Louis Conforti, former chief financial officer of Chicago-based office owner Prime Group Realty Trust. In
its previous filings , Stark said it might decide in the future to seek control or otherwise influence Mills' management policies. Conforti did not return a call seeking comment Thursday morning.