Mills in free fall

Waterfront project in doubt after developer is slammed by Wall Street and questioned by Port officials

By Steven T. Jones

Since having its Piers 27-31 project overwhelming rejected by the San Francisco Board of Supervisors last month, Mills Corp. has been hit by a series of setbacks that raise questions about its credibility and the viability of its proposed waterfront office, retail, and recreation project.

The Virginia mall developer's stock price on Nov. 1 plunged by about $300 million – almost 15 percent in a single day, its biggest drop ever – after the company delayed the release of its second-quarter earnings report and warned that its third-quarter earnings "will be substantially below expectations." The stock has fallen 30 percent this year.

The report, now scheduled for release Nov. 9, will likely show huge losses and a multiyear restatement of earnings following an independent audit filed March 31 with the US Securities and Exchange Commission concluding that Mills "did not maintain effective internal control over financial reporting."

Among the problems identified by the accounting firm Ernst and Young were flawed assumptions about capitalization, lease arrangements, joint venture interests, acquisition purchase-price accounting, and the calculation of its equity. As the problems were mounting in early October, Mills's chief operating officer and its chief accounting officer both abruptly left the company.

Mills spokesperson David D'Ononfrio referred questions about the company's overall health to national spokesperson David Douglas, who would not comment on anything before the Nov. 9 announcement except to say the sudden departure of the top officers was unrelated to the company's current financial problems.

While it may be too early to predict an Enron-style meltdown, the financial shenanigans raise questions about the optimistic fiscal assumptions that Mills has been using as the basis for its Piers 27-31 project, such as its expectation of office lease rates that are far higher than average for San Francisco (see "Does Mills Make Sense?" 9/14/05).

While Mills officials strenuously downplay the financial developments, the business press has had a bleak assessment of the company's prospects. A Nov. 2 Wall Street Journal article noted, "The departure of two officers coinciding with concerns about accounting irregularities should be raising more eyebrows than it has." That same day, a Chicago Sun-Times business reporter indirectly raised questions about the Piers 27-31 project when he wrote, "Poor earnings and a falling share price could increase pressure on Mills to get out of long-term developments."

Washington Post business columnist Jerry Knight wrote Nov. 7 that the real estate investment sector is generally in decline and that Mills has been the most troubled big company. Knight notes that four Wall Street firms cut their ratings of Mills stock, while he said prominent analyst David Fick has concluded, "It was impossible to make a recommendation because the company is 'stonewalling' on its finances."

Such an accusation echoes points made by San Francisco supervisors during an Oct. 18 hearing on whether the project was fiscally feasible and responsible. The supervisors ruled on a 9-1 vote that it was neither. While Mills's abrupt decision to give up a $2.1 million public subsidy will invalidate the board vote if the Port Commission agrees to modify its contract with Mills, that approval might not be the automatic action the Mills officials said it would be.

After several supervisors questioned the financial data that Mills continues to withhold and the company's murky relationship with its recreation partner, YMCA of San Francisco (see "The Y Factor," 10/26/05), Port executive director Monique Moyer on Oct. 20 sent a strongly worded letter to Mills demanding detailed financial information by Nov. 18, in advance of a potential Dec. 13 hearing by the Port Commission.

"Before the proposed amendment can be calendared at the Port Commission, I must be prepared to address the important issues raised at the Board of Supervisors' recent fiscal feasibility hearing regarding the arrangement between the Mills Corporation and the YMCA," Moyer wrote, noting the Port had requested that information twice before.

Among the items Moyer wants are a signed agreement between Mills and the YMCA (which doesn't yet exist but which both Mills and YMCA officials tell the Bay Guardian is imminent), an update on the $30 million construction-cost estimate, a commitment by Mills to build the facility no matter what it costs, terms of repayment by the YMCA if it falls short on its fundraising goals (which it already has), and a detailed financial analysis showing how that loan repayment would not affect other YMCA branches or operations.

Given that the YMCA has never raised anywhere near $30 million for a single project, the terms of the deal could have a big impact on ongoing YMCA operations – and if the Y can't come up with the cash, Mills has the option to choose another recreation partner. D'Onofrio told us the debt would not affect YMCA operating funds, while also confirming that Mills expects to be paid back: "It would be some manner of loan, and the YMCA would repay Mills."

If the Port Commission doesn't approve the contract change, then the board vote stands, and the project is essentially dead. In any event, the exclusive negotiating agreement that Mills and the Port entered in 2001 ends in March, and if the commission doesn't extend it, the issue is moot.

Meanwhile, Mills must still return to the Board of Supervisors sometime next year for final approval of its project. Considering what happened last time, D'Onofrio and other Mills officials have been publicly threatening to take the matter to the ballot and trumpeting a poll they say indicates 65 percent support for their project.

Although D'Onofrio didn't respond to our requests for a copy of the poll question, we used the Sunshine Ordinance to obtain an Oct. 16 memo from pollster Ben Tulchin of Greenberg Quinlan Rosner Research, which included the poll question and results. Not only did the poll not include any opposition arguments, it also included this inaccurate statement: "The area will be converted into open space and be open to the public."

D'Onofrio agreed the poll was "inarticulately written" and "missing a word" (qualifying that only a portion of the area will be open space) but said he still had faith in Tulchin and the poll. Tulchin would not admit any problems with his poll, noting, "It was language vetted by their [Mills] attorneys," and proceeded to argue for the various merits of the Piers 27-31 project as if he were its advocate.

Jon Golinger, spokesperson for the project opponents, dismissed the poll as "not worth the paper it's printed on," while respected San Francisco pollster David Binder (who has done polling for project opponents that laid out the arguments of both sides and found people oppose the project by a margin of more than two to one) told us Tulchin's poll "is so positively worded that it's amazing 35 percent didn't support it."

Board of Supervisors president Aaron Peskin told us it was already clear that Mills couldn't be trusted even before the recent revelations of financial improprieties, "and now we're seeing Wall Street saying that they're coming apart at the seams."

E-mail Steven T. Jones at steve@sfbg.com.