Mills Corp. stunned the industry in early November when it rescheduled its third-quarter earnings call only to come back and report that it had missed badly on its FFO and profit for the period. Analysts had been expecting the firm's FFO to be $1.06 per share, but it came in at 45 cents per share. The news sparked a huge sell-off of the company's stock and left its future uncertain. Moreover, it had some analysts debating whether Mills' problems were an aberration or a sign of things to come in the retail real estate industry.

The company attributed the crisis to a host of one-time costs, such as canceled projects in Tampa, Fla., and Florence, Italy, as well as costs associated with proposed projects in San Francisco and outside New York. It also had costs associated with straight lining of rents and some bad debt expenses. For the first nine months of 2005, Mills' NOI was down 1.4 percent compared with 2004.

“While our external growth strategy has been successful, Mills has clearly reached the stage where top management needs to increase its focus on forecasting and planning and enhancing our performance management, accounting control and reporting functions,” CEO Laurence Siegel said in the conference call with investors.

Analysts agreed with that assessment.

“It's clear that the management team does not have full grasp of all its moving pieces and how they impact earnings,” Deutsche Bank REIT analyst Louis Taylor wrote in a report. “There is probably some value in the development pipeline, but this is offset by accounting uncertainty and poor financial oversight.”

Investors punished the company first when it delayed its call and again when it actually reported earnings. (It also delayed its 2004 year-end call earlier in 2005.)

The company's stock reached a new 52-week low of $38.83 before rising to about $41.50 at press time — far below the value of its real estate, estimated at $64 per share, according to analysts. That has led some analysts to speculate that Mills is suddenly an extremely attractive takeover target. Many analysts also downgraded the company.

Analysts and investors were also angry with Mills for its initial vague announcement and for a perceived evasiveness during its more than two-hour call. “The terse content is inexcusable,” wrote David Fick, a REIT analyst with Legg Mason.

Mills executives explained that when they decided to delay the call because they didn't have a clear handle on the problems, they determined it would be less damaging to provide no information, rather than hint at what its problems might be. Mills has refused to comment further.

In October, three executives left the company. Mills' chief accounting officer, Michael Green, resigned effective Oct. 27 to accept a position as CFO of a private Washington, D.C.-based company. A week earlier, Mills announced that Kenneth Parent, COO, would retire April 1, 2006 and Tom Frost, executive vice president, would retire on Dec. 31. No reasons were given for their departures, which raised eyebrows at the time.

The question is whether Mills' troubles are specific to the company or a warning that retail real estate's run is at an end. The truth seems to be a bit of both. On one hand, Mills backed itself into a corner by growing too quickly and losing a handle on its operations. Its ambitious development pipeline also includes two projects that still face hurdles (The Piers in San Francisco and Meadowlands Xanadu in New Jersey).

But Mills also provides a cautionary tale for the sector. More REITs are devoting capital to development, with some having pipelines worth more than $1 billion. With material prices inflating rapidly, delays can send up construction costs and cut into initial projected yields.

Mills' announcement was the most frightening of the third-quarter earnings season, but retail REITs exhibited other signs of weakness (see story on page 18) as did REITs in general. Morgan Stanley said 40 percent missed consensus FFO projections, including several retail REITs.