The smallest regional mall REIT is suddenly raising a lot of eyebrows.

When Feldman Mall Properties Inc., a regional mall REIT with seven malls totaling about 7 million square feet, postponed its year end earnings release for a second time on Mar. 30, it set off alarms with investors, dropping the stock below $12 per share (though above its 52-week low of $10.10). This week brought more news to feed investors' anxiety: Feldman announced that it was receiving a cash infusion of $75 million from Kimco Capital Corp. and Inland American Real Estate Trust Inc.

Chairman & CEO Larry Feldman says that neither the filing delay nor financing deals should be cause for concern. Feldman explains the 10-K is being held back by "normal accounting issues." Feldman blames the late SEC filing on the increasing demands for detailed reporting by public firms. "Being public today in the post Enron-era requires a level of scrutiny that few companies have ever seen,” he says. “That intense accounting demand, plus running our company, caused a delay. You shouldn't read into it any more than that." One source familiar with the situation indicated that it came down to choosing between lining up the financing or getting the filings out on time and the company chose the former. As of September 30, 2006—its last filing—Feldman had $36 million cash on hand.

Investors responded negatively to Feldman's reporting delays with the stock price dropping below $12 per share after announcing the second delay. The stock jumped to $13 per share on April 17 on news of the deals with Inland and Kimco – matching its 52-week high. But that didn't last long – as of April 19, the stock was down 9 percent to $11.87 per share. Over the past 12 months, Feldman's stock has not enjoyed the appreciation that other retail REITs have experienced.

In general the company has struggled since going public. It has posted net losses in 2005, 2004, 2003 and 2002. The last time it reported results, Feldman's FFO for the third quarter 2006 was $3 million, or $0.21 per diluted share compared to $3.5 million, or $0.25 per diluted share for the same period in 2005. And in November 2006, the company said it expected its fourth quarter FFO to come in at $0.18 to $0.20 per diluted share—below analyst expectations of $0.24 per diluted share. The company also missed earnings expectations in 2005. This is also not the first time Feldman has delayed an SEC filing. Last August, it delayed its 10-Q.

These are all reasons that shareholder Mercury Real Estate Advisors LLC of Greenwich, Conn., which owns 9.8 percent of Feldman’s stock, has pushed for a sale of the company. It has submitted a proposal to be voted on at this year’s annual meeting to hire an investment banker to investigate selling the company. Mercury pointed to Feldman’s performance and late filings as two reasons for the sale. Feldman has not yet announced the date of its annual meeting, but last year it occurred at the end of May.

Rich Moore, a REIT analyst with RBC Capital Markets, questions why Feldman—a relative midget in the mall business, with just $55.2 million in annual revenue in 2005, is unable to close its books on time, when much larger mall operators can. "Feldman only has seven malls; Simon has hundreds, and they had no problem," he points out.

"When you don't file your last quarter numbers it always raises a red flag,” Moore adds. “That, combined with the Kimco and Inland deals, is suspicious, especially since Feldman hasn't given us a date to expect the filings."

Feldman now says that the 10-K will be filed “soon” and the company does not expect to be late with its first-quarter 10-Q report, which is due on May 10. Feldman says that leasing activity for its redeveloped malls has been strong with the 700,000-square-foot Foothills Mall almost 100 percent leased and 80,000 square feet of new leases signed at 900,000-square-foot Harrisburg Mall in Harrisburg, Pa.

On the financing front, Feldman received a $25 million loan with an interest rate of 7 percent from Kimco Capital (a subsidiary of strip center giant Kimco Realty Corp.) and plans to issue up to $50 million of convertible preferred stock in a private placement to Inland American, a REIT sponsored by Oak Brook, Ill.-based Inland Real Estate Group of Companies Inc. Feldman will issue 2 million shares at $25, of which Inland American intends to purchase $15 million in preferred stock by April 30 and the remaining $35 million within 12 months of the first stock purchase.

In conjunction with the Inland deal, Thomas McAuley, president of Inland Capital Markets Group Inc. and a director of Inland Real Estate Corp., will be added to Feldman’s board of directors at the time that the preferred shares are first issued. (McAuley also sits on the boards of several other companies. Previously, he was chairman and CEO of IRT Property Company, a shopping center REIT acquired by Equity One in 2003.)

Both Kimco and Inland have had previous relationships with Feldman. Inland, in fact, is Feldman’s fifth-largest shareholder, owning 9.1 percent of Feldman’s stock. Kimco, meanwhile, formed a joint venture with Feldman in February 2006 under which Kimco took a stake in Feldman’s Foothill Mall property and also provided a $17.2 million bridge loan to Feldman.

Moore speculates that the REIT in recent months has seen its debt coverage ratio slip, which could be why it needed to raise more funds. Its debt coverage ratio is down to 1.3x, from 1.6x at the end of the third quarter of 2006. The deterioration in debt coverage could indicate a need for more money and explain why fourth quarter numbers haven't been forthcoming. "But, you can't hold off filing documents because you don’t like what they say," Moore says.

Larry Feldman says the company will use the funds to execute its business strategy, namely to invest more than $200 million on renovation and construction at its existing properties and to explore new acquisition opportunities. The REIT’s business plan to date has been to buy troubled malls in secondary and tertiary markets and execute turnaround strategies.

--Jennifer Popovec