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Mills placed vision before thinking, controls


It is tempting to see Mills Corp.'s travails as a retail parable, a warning of long-predicted consumer collapse.

Shoppers are hocked to the eyeballs, and at some point they'll stop spending, the argument goes. Who might be more vulnerable to the beginning of the retail meltdown than the mall company known for such frivolities as glow-in-the-dark minigolf, bass ponds and a movie complex from Egypt's 19th dynasty?

Fortunately, Mills' problems seem to be more about Mills than its customers. At the Arlington, Va.-based trust that owns Arundel Mills, Potomac Mills and other megamalls, growth, vision and imagination outstripped controls, accounting and clear thinking.

The result is a mess, but it isn't an economic indicator.

After exceeding $65 a year ago, Mills stock closed yesterday at $28.41 and has fallen as low as $26.35 in recent months.

The company, scheduled to move its headquarters to Chevy Chase this year, is revising five years' worth of financial statements and is essentially holding an auction to sell itself or get a capital injection. The Securities and Exchange Commission is investigating its accounting.

"This is a company in tumult," says Barry Vinocur, editor of financial newsletter Realty Stock Review and a prominent pessimist on Mills. "We believe that the company has more serious problems than investors understand."

Vinocur says he doesn't hold positions in Mills stock or any other companies he covers.

At the center of Mills' mess is the most grandiose project yet in a company known for grandiosity. Xanadu, a planned 5-million-square-foot New Jersey mall named after an opium hallucination, is supposed to include an indoor, refrigerated ski slope and a minor-league baseball stadium.

It was supposed to open next year, but numerous mix-ups pushed that back to at least 2008. New Jersey newspapers report that only four tenants have signed leases. Mills acknowledges the project will exceed its $1.3 billion budget; industry players speculate the cost could hit $2 billion if Xanadu is ever completed, which would make it difficult for the company to make money no matter how successful the mall turns out to be.

And Xanadu is only the most visible of Mills' dubious properties. Minnesota's Southdale Mall is a problem; so is Pittsburgh Mills, which opened last year and where the Pittsburgh Tribune Review reports that traffic is slow, and there are two dozen vacant stores.

But these problems say more about Mills' management team, led by consummate salesman Laurence Siegel, than the retail economy. On a national basis, consumer spending is holding its own. While few retail companies are booming, few are experiencing the severity of problems facing Mills. And even Mills holds numerous strong properties, including the always-crowded Arundel Mills.

Mills' basic problem is that it expanded too fast, applying its blend of outlet stores and entertainment in huge complexes to places that couldn't support them. At the same time, its accounting systems apparently failed to give a clear look at what was happening, letting the company steer further into danger.

The upshot is the likely sale of the company. June 13 was the deadline for bids. Mills has said it was contacted by "a variety of parties," but it disclosed no other details. Vornado Realty Trust is interested, according to filings made with the Securities and Exchange Commission. General Growth Properties, which bought Columbia-based Rouse two years ago, is another likely suitor.

If Mills is sold, or cut in parts or recapitalized, its deal to switch its headquarters and 325 jobs to Chevy Chase is likely to change. Maryland's Department of Business and Economic Development gave Mills $1.2 million in incentives to make the move, but if the company doesn't hit the job targets it must repay the money, says DBED managing director James Henry.

The most important variable for investors is a potential sale price. It's hard to figure the value of a company that lacks certified financial statements, but not everybody is as pessimistic about Mills as Vinocur.

Baltimore-based David M. Fick, who follows the mall outfit for Stifel Nicolaus, rates it a risky but "speculative buy" and thinks it might be worth $41 based on a bottom-up analysis of the properties.

In other words, the malls might be doing better than Wall Street thinks. That's another reason not to equate Mills stock with the American consumer.


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