One of the world’s largest mall REITs announced it may make material adjustments to its 2004 and 2005 financial statements, prompting at least one analyst to downgrade the company’s stock from “Hold” to “Sell.”

Financial troubles continue to mount for Arlington, Va.-based The Mills Corp. (NYSE: MLS). The company’s share price fell more than 11% to $32.40 on Monday, March 20, from a $36.73 closing price the previous Friday, after the company told the SEC it would miss a filing deadline for its 10K year-end report due to an ongoing financial review.

In an 8K report filed after the close of trading March 17, Mills suggested it may have overstated net operating income, and anticipated adjustments that would likely lower its 2005 financial position. Mills had previously stated it expected its 2005 results and funds from operations to be significantly below market expectations, and that prior earnings/FFO guidance for 2005 shouldn’t be relied upon.

Hours before Mills’ filing, Citigroup analysts had already downgraded the company’s stock from “Hold” to “Sell,” reasoning that Mills’ net asset value per share could be as much as $10 less than the $40-plus NAV the analysts had previously calculated for the company. Citigroup analysts recommended investors wait on the sidelines until Mills provides greater clarity with its reporting and lowered Mills’ target price to $35, citing complex and unaudited financials, unknown terms of (joint ventures), a huge development pipeline and high leverage. “Our confidence in Mills’ NAV is low and deteriorating,” the analysts wrote.

After Mills’ end-of-day filing, Citigroup reiterated its call for investor caution. In the absence of reported financials, its analysts speculated that accounting for tenant improvements could be part of Mills’ troubles and could have an estimated impact of $15 million to $30 million on net operating income.

The recent turmoil is a blow to a company that has been emulated for its mix of unique entertainment, retail and dining experiences in market-dominating projects. It currently owns 42 properties in the United States, Canada and Europe, with a total portfolio of 51 million sq. ft. Analysts and investors have said Mills’ troubles stem at least in part from an overemphasis on development. The company’s largest corporate investor, Cohen & Steers, experienced poor performance from regional mall stocks last year and attributed those results primarily to its position in Mills. In Cohen & Steers’ 2005 review, it called Mills as 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 also downgraded Mills shares to “Sell” on the Monday after Mills’ disclosure to the SEC, lowering the company’s risk-adjusted NAV by $10 to $30. In a worse-case scenario, Mills’ NAV could fall as low as $25, he predicts.

Nussbaum believes Mills needs cash to fund capital requirements, including Block 37, a Chicago development that suffered a work stoppage when contractors demanded pay in advance; and Meadowlands Xanadu, a 4.8 million-square-foot entertainment, sports, retail, office and hotel complex under development in Bergen County, N.J. “Given Mills’ cash needs, we believe that a preferred issuance of about $300 million is a reasonable assumption,” Nussbaum stated.

Other potential drains on Mills’ coffers include settlements of class-action lawsuits filed in relation to earnings restatements, which could reduce NAV by $3 per share; and a $2.50 per share NAV reduction if ongoing trouble finding tenants for Meadowlands Xanadu brings lower-than-expected yields and requires a write-off on the project.

The recent downgrades are only the latest of Mills’ escalating financial plight. In November, the company shocked investors when it reported third-quarter earnings of 45 cents per share, when analysts had been expecting $1.06 per share for the period. Then in January, Mills announced it would restate its financials for 2000 through the third quarter of 2005, and disclosed that the SEC had launched an informal inquiry into the company. In February, directors announced a change of executives and plans to explore selling the company, with a potential dividend reduction in the event of a sale.

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 for this report.