It’s Clear Now!

MILLS CORP. CEO SAYS NO HIDDEN PROBLEMS (article)
www.tribune.com | ...>Real Estate Investment Trusts (REIT)

Transparency is the reason investors give when investing in the U.S. markets.  Something like 85% of offshore capital invested outside the home country goes to U.S. markets as we have comparative uniform practices and high audit standards.  Obviously, though, the case of Mills Corp. shows we’re too lax in the real estate markets like we were at Enron and Tyco and the like.  If not an audit issue, the problem is centered on oversight deficiencies by the Board.  It is certain that this problem has been in formation for some time and yet investors are facing operations failures and insolvency in a rush.  We are told that nobody was watching the store while the company was out building more stores and now doesn’t have the funds to keep up operations past the end of the current quarter as $ 352 million in accounting irregularities have been discovered.

The 8-K recently submitted shows that the 39 existing shopping centers comprising the portfolio are operating at “C” to “C-“ sales volumes from locations which can be termed “A” to “B” in my opinion.  Three of the properties are less than 85% occupied in the aggregate while the balance are reported to be slightly more than 90% full.  Since we are used to alarm bells here now, let’s anticipate that retail sales volumes will be pressured down as the country shifts from a housing/retail model to a new investment arena based on alternative fuels and other endeavors.  85% occupancy is close to break even for many properties without the corporate burden Mills has, so we can see those three properties not paying for themselves through operations now.  Furthermore, it’s a short drop from 90% to break even occupancy for the remainder of the properties.  Since the portfolio totals 48 million sq. ft., it can be seen that one vacancy in each property of 50,000 sq.ft. may do the job of bringing the portfolio down to break even status.  Furthermore, rents for replacement tenants will be pressured as retailers will see the opportunity for a bargain basement windfall.  It will be hard to convince retailers otherwise as long as the current volumes must be presented as the immediate look-back.

This company has become a matter of financing a new business plan to replace the old failure.  It may be that the old failure was due to inadequate financing in the first place.  Colony Capital and Cambridge-Ivanhoe think that was the problem in new Jersey and offshore and the Chicago development property has been revitalized by others also.   Farallon Capital and Gazit Globe, the two largest current investors, will be key to formulating the comeback unless Farallon looks to cut its losses by exiting now at a disadvantage.  Gazit is a recent investor and an unknown quantity in the U.S, but they are making noises like they wish to be large and in charge.

Saving the old bacon is a lost cause now.  Gazit or its successor looks to be the future.  Stay tuned.