Financial troubles keep mounting for one of the world's most ambitious mall developers. Less than a week after warning that it may make material adjustments to its 2004 and 2005 financial statements, Arlington, Va.-based The Mills Corp. (NYSE: MLS) disclosed that informal questioning by the Securities and Exchange Commission has elevated to a formal investigation.

On Friday, March 17, Mills said post-closing that an ongoing review might produce “material adjustments” to its 2004 and 2005 financial statements, likely lowering the company's 2005 financial position. The following Monday, Mills shares fell more than 11%.

Two days later, when the company disclosed that the Securities and Exchange Commission would conduct a formal investigation, share prices slipped another 5%.

The recent turmoil is a blow to a company that has been emulated for its mix of unique entertainment, retail and dining in high-profile projects.

“Our confidence in Mills' net asset value (NAV) is low and deteriorating,” wrote Citigroup analysts, who downgraded Mills from “hold” to “sell” on March 17 and lowered Mills' target price to $35 from $40. With no reported financials, analysts recommended investors wait until Mills clarifies its reporting.

Accounting for tenant improvements could be part of Mills' troubles, Citigroup analysts speculated. It could have an estimated impact of $15 million to $30 million on net operating income.

Both analysts and investors have said Mills' difficulties stem at least in part from an over-emphasis on development. Mills' largest corporate investor, Cohen & Steers, in its 2005 review called Mills its “worst performer” of the year with a 31.3% decline “as a result of company-specific problems relating to an overly aggressive development pipeline.”

Banc of America analyst Ross Nussbaum, who also downgraded Mills to “sell,” predicted in a worst-case scenario that Mills' NAV could fall to $25. He believes Mills needs cash for development. Potential drains on the REIT's coffers include class-action lawsuits related to earnings restatements, and a possible write-off on Meadowlands Xanadu.

Stifel Nicolaus analyst David Fick believes that investors and other analysts are over-estimating Mills' dilemma. Sensing an over-sell, he upgraded Mills shares to “buy” on March 24. “While missteps and uncertainty warrant some of the price pullback, the properties remain solid, and Mills shares are cheap compared to real estate value,” Fick wrote.

Shareholder reaction turned negative in November when the company reported third-quarter earnings of 45 cents per share, though analysts had projected $1.06 per share. In February, directors announced a change of executives and plans to explore selling the company.

Although Vornado Realty Trust is in informal talks with Mills, analysts say a sale is unlikely until Mills releases audited financials to help suitors calculate bids. Mills executives declined to comment.

NYSE symbol: MLS

March 17 stock price: $36.73

March 23 stock price: $28.85

Market cap: $1.68 billion

Holdings: 51 million sq. ft.

Under development: Meadowlands Xanadu, Bergen County, N.J.; 108 N. State Street, Chicago; Piers 27-31, San Francisco; Mercati Generali, Rome, Italy; Potomac Center, Woodbridge, Va.

Value of projects in pipeline: $3.3 billion (Mills' share, $2 billion)