In the first big retail deal of 2005, Mills Corp. has purchased two Midwest malls -- one in Minnesota and the other in Wisconsin -- from -- Blackstone Real Estate Advisors and Polaris Capital for $452 million. The two projects, the 1.3-million-square-foot Southdale Center in Minneapolis and 1.2-million-square-foot Southridge Mall in Milwaukee, are the first in those respective states for Mills as it continues to diversify its portfolio.

After taking a brief respite for the holiday season, mall buyers have emerged en masse this week. In addition to the Mills deal, newly public REIT Feldman Mall Properties acquired an asset in New York (see story below) and Canyon-Johnson Urban Fund sold its 750,000-square-foot development at 1555 Vine Street in Los Angeles for an undisclosed price to Blackrock Inc.

For Mills Corp., the deal is another step in its transformation. It built its portfolio up from an outlet/entertainment center specialty to one with diverse assets including regional malls, urban redevelopment projects, an international portfolio and unique projects such as the forthcoming Meadowlands Xanadu.

Despite the firm's creativity, analysts wondered if Mills hadn't paid too much in its latest deal. Mills said its first-year unlevered yield would be just 6.4 percent.

"Our investment thesis on Mills is based on the premise that the development pipeline will drive industry-leading growth, and with capital already in place to fund that development, execution is the only overhang," wrote Michael Bilerman, an analyst with Smith Barney in a research report. "Acquisitions, while lower risk than new development, generate lower yields, consume precious human and financial capital, and distract management's focus on sourcing and working on new development."

That's even with tenants at the two properties averaging $418 per square foot. Mills can increase its future yield by redeveloping empty anchor space for tenants that can be more profitable. A former Mervyn's sits vacant at Southdale, while Southridge has 46,000 square feet from a former Younker's.

Mills will look to re-lease the Mervyn's store to another department store. It also has approvals in place to build another department store on a vacant pad. Mills added that it is looking for a joint venture partner on the assets, which would reduce its financial commitment and help increase its yield.

Morgan Stanley retail REIT analyst Matthew Ostrower speculated that Mills will attempt to reposition Southdale as a luxury alternative to the nearby Mall of America, pointing to the fact that Nieman Marcus is reportedly interested in taking Mervyn's old space.

On the buyer's side, the deal comes at the same time that Blackstone is marketing the Tri-County Mall in Cincinnati. Blackstone, a private equity investor, has traditionally focused on office, industrial and lodging, but it does own a few retail properties.