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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

For the Quarterly Period Ended March 31, 2003

Commission File Number 1-12994

THE MILLS CORPORATION
(Exact name of registrant as specified in its charter)

1300 Wilson Boulevard, Suite 400, Arlington, Virginia 22209
(Address of principal executive offices—zip code)

(703) 526-5000
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

              Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý     No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

              Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ý    No o

               Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

44,095,573 shares of Common Stock
$.01 par value, as of May 12, 2003

THE MILLS CORPORATION
FORM 10-Q
INDEX

               Certain matters discussed in this Form 10-Q and the information incorporated by reference herein contain "forward-looking statements" for purposes of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations and are not guarantees of future performance.

              Forward-looking statements, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "would be," or "continue" or the negative thereof or other variations thereon or comparable terminology are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Among those risks, trends and uncertainties are:

•

the general economic climate,

•

the supply and demand for retail properties,

•

interest rate levels and fluctuations in the exchange rates between the U.S. Dollar and foreign currencies in countries where we have investments,

•

the availability to us of financing for our development projects or acquisition activities,

•

risks associated with the development, acquisition and operation of retail properties, including risks that the development of the project may not be completed on schedule, that we may not be able to lease available space to tenants at favorable rental rates, that tenants will not take occupancy or pay rent in accordance with their leases, or that development or operating costs may be greater than anticipated, and

•

those risks described in the section entitled "Risk Factors" in our Form 10-K for the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 31, 2003.

We undertake no duty or obligation to publicly announce any revisions to, or updates of, these forward-looking statements that may result from future events or circumstances.

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PART I—FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements and Notes

THE MILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)

See Accompanying Notes to Consolidated Financial Statements.

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THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, In Thousands, Except Per Share Data)

See Accompanying Notes to Consolidated Financial Statements

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THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(In Thousands)

See Accompanying Notes to Consolidated Financial Statements.

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THE MILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, In Thousands)

NON-CASH FINANCING AND INVESTING ACTIVITY PROVIDED IN NOTE 12.

See Accompanying Notes to Consolidated Financial Statements.

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THE MILLS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, Dollars in thousands except per share data)

1. ORGANIZATION

              The Mills Corporation (the "Company") is a fully integrated, self-managed real estate investment trust ("REIT") and provides development, redevelopment, leasing, financing, management and marketing services with respect to all of its properties currently in operation. The Company conducts all of its business and owns all of its properties through The Mills Limited Partnership ("Mills LP") and its various subsidiaries. The Company is the sole general partner of Mills LP in which it owns a 1% general partner interest and a 71.91% limited partner interest as of March 31, 2003.

              The Company wholly owns or has ownership interests in and develops, redevelops, leases, acquires, expands and manages a portfolio currently consisting of 20 retail and entertainment-oriented centers (13 super-regional "Mills Landmark Centers" and seven "21^st Century Retail and Entertainment Centers"), three community shopping centers (the "Community Centers"), a portfolio of 19 single tenant properties subject to net leases that operate as CVS pharmacies ("Net Lease Properties"), and other related commercial development. The Mills Landmark Centers and the 21^st Century Retail and Entertainment Centers comprise the primary focus of the Company's operations. The Company also focuses on developing projects internationally. The Company's first international retail and entertainment project, Madrid Xanadú, is currently under construction. As of March 31, 2003, Mills LP owns or holds an interest in the following operating projects:

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              The Company is actively involved in the development or predevelopment of a number of projects, including Madrid Xanadú (Madrid, Spain), St. Louis Mills (St. Louis, MO), Cincinnati Mills (Cincinnati, OH), Pittsburgh Mills (Pittsburgh, PA), Vaughan Mills (Toronto, Canada), Meadowlands Xanadu (East Rutherford, NJ), and San Francisco Piers 27-31 (San Francisco, CA).

              Mills LP also owns MillsServices Corp. ("MSC"), a taxable REIT subsidiary that provides development, management, leasing and financial services to entities owned by unconsolidated joint ventures of the Company. MSC does not perform any services for entities in which the Company is not a significant investor. MSC owns 100% of Mills Enterprises, Inc. ("MEI"), an entity that holds investments in certain retail joint ventures and owns 60% of FoodBrand L.L.C. ("FoodBrand") (see Note 6), the Company's food and beverage entity that master leases, manages and operates food courts and restaurants.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

              The accompanying unaudited consolidated financial statements have been prepared by the Company's management in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the full year. These consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-Q and the Company's audited financial statements and related footnotes, included in the Company's Annual Report for the year ended December 31, 2002, on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003.

              The Company conducts all of its business and owns all of its properties through Mills LP and its various subsidiaries. The Company's consolidated financial statements include the accounts of the Company and all subsidiaries that the Company controls. The Company does not consider itself to be in control of an entity when major business decisions require the approval of at least one other general partner. Accordingly, the Company accounts for its joint ventures under the equity method.

              All significant intercompany transactions and balances have been eliminated in consolidation.

              Minority interest represents the ownership interests in Mills LP not held by the Company.

REAL ESTATE AND DEVELOPMENT ASSETS

              Income producing property is stated at cost and includes all costs related to acquisition, development, leasing and construction, including tenant improvements, interest incurred during construction, costs of pre-development and certain direct and indirect costs of development. Costs incurred during the predevelopment stage are capitalized once management has identified and secured a site, determined that the project is feasible and it is probable that management is able to proceed. Land held for sale is carried at the lower of cost or fair value less costs to sell. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Significant renovations and improvements, which improve or extend the useful life of the assets, are capitalized.

              Income producing properties are individually evaluated for impairment when various conditions exist that may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis) from a property is less than its historical net cost basis. If a determination has been made that a permanent impairment has occurred we would record an impairment charge. In addition, the Company writes off costs related to predevelopment projects when it determines that it will no longer pursue the project.

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              The Company is actively pursuing acquisition opportunities and will not be successful in all cases. Costs incurred related to these acquisition opportunities are expensed when it becomes probable that the Company will not be successful in the acquisition.

              Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, as follows:

              Total depreciation expense was $11,086 and $6,754 for the three months ended March 31, 2003 and 2002, respectively.

              Total interest expense capitalized to real estate and development assets, including investments in unconsolidated joint ventures under development, was $14,738 and $8,367 for the three months ended March 31, 2003 and 2002 respectively.

              Acquisitions of properties are accounted for utilizing the purchase method and, accordingly, the results of operations are included in the Company's results of operations from the respective dates of acquisition. The Company uses various valuation methods to allocate the purchase price of acquired property between land, buildings and improvements, equipment and other identifiable intangibles such as lease origination costs, acquired below market leases, and any debt assumed.

REVENUE RECOGNITION

              The Company, as lessor, has retained substantially all the risks and benefits of property ownership and accounts for its leases as operating leases. Minimum rent from income producing properties is recognized on a straight-line basis over the terms of the respective leases. Percentage rent is recognized when tenants' sales have reached certain levels specified in the respective leases. Recoveries from tenants for real estate taxes and other operating expenses are recognized as revenue in the period the applicable costs are incurred.

              MSC, a wholly owned subsidiary of the Company, has entered into agreements with the unconsolidated joint ventures (see Note 6) to provide management, leasing, development and financing services for these joint venture properties. For management services, MSC is entitled to receive monthly a percentage of rental revenues received by the joint venture property. For leasing services, MSC is entitled to an agreed-upon rate per square foot of space leased, which fee is recognized upon execution of a lease. For development services, MSC is entitled to an agreed-upon fee that is deferred during the pre-development stage of the project and subsequently recognized ratably during the development period once a development agreement is executed. For financial services, MSC receives a fee equal to an agreed upon percentage of the total loan commitment, which fee is recognized when a construction loan or permanent loan is committed by the lender. Costs incurred to provide leasing, development and financial services are capitalized when incurred and subsequently expensed as the fee is earned. Other fee income from unconsolidated joint ventures reflects the fees earned, net of the costs incurred to provide these services and the elimination of intercompany profits.

FOREIGN OPERATIONS

              The U.S. dollar is the functional currency of the Company's consolidated and unconsolidated entities operating in the United States. The functional currency for the Company's consolidated and unconsolidated entities operating outside of the United States is the local currency of the country in which the entity is located.

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              The Company's consolidated subsidiaries whose functional currency is not the U.S. dollar translate their financial statements into U.S. dollars. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date and income statement accounts are translated using the average exchange rate for the period. However, income statement accounts which represent significant, non recurring transactions are translated at the rate in effect as of the date of the transaction. Gains and losses resulting from the translation are immaterial. The Company translates its share of the income of its unconsolidated entities when the functional currency is not the U.S. dollar at the average exchange rate for the period. For the three months ended March 31, 2003, the total net foreign currency exchange gain related to the Company's unconsolidated joint ventures was $2,623 of which the Company's portion of $1,610 was recorded in equity in earnings. The Company and its foreign entities have certain transactions denominated in currencies other than their functional currency. In these instances, nonmonetary assets and liabilities are reflected at the historical exchange rate, monetary assets and liabilities are remeasured at the exchange rate in effect at the end of the period, and income statement accounts are remeasured at the average exchange rate for the period. Gains and losses from remeasurement are included in the Company's results of operations. For the three months ended March 31, 2003, the Company's net foreign currency exchange gain, totaling $2,259 arises primarily from the remeasurement of intercompany advances from the Company to unconsolidated joint ventures. In addition, gains or losses are recorded in the income statement when a transaction with a third party, denominated in a currency other than the functional currency, is settled and the functional currency cash flows realized are more or less than the exchange rate in effect when the transaction was initiated.

USE OF ESTIMATES

              The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

RECLASSIFICATIONS

              Certain amounts in the 2002 consolidated financial statements have been reclassified to conform to the current year presentation.

3. ACQUISITIONS AND DISPOSITIONS

ACQUISITION OF THE CADILLAC FAIRVIEW PORTFOLIO

              In January 2003, the Company, through Mills LP, completed the acquisition of five shopping center properties: Broward Mall, Dover Mall and Dover Commons, The Galleria at White Plains, Northpark Mall and The Esplanade from The Cadillac Fairview Corporation Limited and various affiliated entities ("Cadillac Fairview"). The properties are located in Ft. Lauderdale, FL; Dover, DE; White Plains, NY; Jackson, MS; and New Orleans, LA. In addition to the five properties, the Company acquired approximately 110 acres of developable land adjacent to the properties. The total aggregate purchase price for the five properties and the developable land adjacent to the properties was approximately $546,615. The allocation of the purchase price between Land and Building and Improvements on the Consolidated Balance Sheet at March 31, 2003 is preliminary and subject to change.

              In conjunction with the Cadillac Fairview portfolio acquisition, the Company obtained a mortgage loan totaling $320,000 secured by all the Cadillac Fairview properties excluding Broward Mall. The mortgage loan bears interest at LIBOR plus 210 basis points. The loan matures in February 2006 and has two one-year extension options. The Company intends to exercise its option to extend the maturity for two one-year terms. In conjunction with this financing, the Company entered into a swap agreement to effectively fix the interest rate at 4.17% through February 2005 on a notional amount of $245,000. Additionally, the Company assumed a $62,000 mortgage loan secured by Broward Mall. The loan bears interest at an effective rate of 5.34% and matures in March 2009. Principal payments of $1,500 are due in March 2004 and 2005, with annual principal payments of $2,000 due on March 2006, 2007 and 2008.

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ACQUISITION OF RIVERSIDE SQUARE

              In December 2002, the Company through Mills LP acquired Riverside Square, a 21^st Century Retail and Entertainment property, from Riverside 062 Partners, L.P. The total aggregate consideration of approximately $86,500, excluding closing costs of $1,067, consisted of a cash payment of $22,567 and mortgage financing totaling approximately $65,000. The cash component of the acquisition was financed with borrowings under the Company's unsecured revolving loan. The interest rate on the mortgage financing is fixed at 5.77% and the loan matures in January 2013. The allocation of the purchase price between Land and Building and Improvements on the Consolidated Balance Sheet at March 31, 2003 is preliminary and subject to change.

ACQUISITION OF FOREST FAIR MALL

              In September 2002, the Company, through Mills LP, acquired the Forest Fair Mall in Cincinnati, Ohio, from Gator Forest Partners, Ltd. ("Gator"). The acquisition was structured as part of an exchange transaction involving the sale of 27 CVS stores (see Note 3—DISPOSITION OF 27 NET LEASE PROPERTIES). The property contains approximately 1,465,000 gross leasable square feet of tenant space. The net purchase price of approximately $68,793 is comprised of the assumption of a $58,284 construction loan and $10,509 of cash funded from the Company's unsecured revolving loan. The construction loan matures in December 2006 and bears interest at LIBOR plus 2.0%. The Company is redeveloping and renovating the mall and will re-open it under the name of Cincinnati Mills in spring 2004.

ACQUISITION OF JOINT VENTURE INTERESTS

              In May 2002, the Company acquired certain interests in five of its joint venture entities from Simon Property Group ("Simon"). In June 2002, the Company also acquired the outstanding interest in Opry Mills that it did not already own (see Note 6).

DISPOSITION OF 27 NET LEASE PROPERTIES

              In conjunction with the Company's acquisition of Forest Fair Mall, the Company entered into an agreement with Forest Partners, Ltd. to exchange 27 of its Net Lease Properties for an aggregate sales price of $58,700, net of transaction costs. The Net Lease Properties exchanged were operating as CVS stores under single tenant net leases, and were subject to mortgages of approximately $55,400. The exchange transaction was completed in March 2003. No gain or loss was recognized in conjunction with the exchange. The results of operations related to the 27 Net Lease Properties are included in Discontinued Operations on the Company's Statement of Operations for the three months ended March 31, 2003 and 2002, respectively. The assets and liabilities related to the 27 Net Lease Properties are included in net Real Estate Held for Disposition and Liabilities on Real Estate Held for Disposition on the Balance Sheet at December 31, 2002, respectively.

              The following is a summary of the income from discontinued operations for the three months ended March 31, 2003 and 2002.

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              Assets and liabilities of the 27 Net Lease Properties held for sale consisted of the following:

PRO FORMA RESULTS OF OPERATIONS—UNAUDITED

              The following unaudited pro forma results of operations reflect the Company's acquisition of the Cadillac Fairview portfolio as if this transaction occurred on January 1, 2003 and 2002, respectively, and the Company's acquisition of Simon's interest in five of the Company's joint venture entities, the Company's acquisition of the interests in Opry Mills that it did not already own (see Note 6) and the Company's acquisition of Riverside Square, as if these transactions occurred on January 1, 2002. In the Company's opinion, all significant adjustments necessary to reflect the effects of the sale of common stock and Series B and Series C Preferred Stock, the use of the net proceeds there from and the acquisition of property interests have been made.

4.     OTHER INCOME (EXPENSE)

        Other income (expense) consists primarily of the FoodBrand operations at Franklin Mills, which is wholly owned by Mills LP.

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5. FINANCIAL ACCOUNTING STANDARDS BOARD INTERPRETATION NO. 46

              In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). Under FIN 46, companies will be required to determine if they absorb the majority of the entities expected losses and/or expected residual returns ("Primary Beneficiary") of a variable interest entity. If they are the Primary Beneficiary, the variable interest entity must be consolidated. All companies with variable interests in variable interest entities created after January 31, 2003 must apply the provisions of FIN 46 immediately. Public companies with a variable interest in a variable interest entity created before February 1, 2003 shall apply the provisions of FIN 46 to that entity no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The Company is in the process of evaluating the effects of the adoption of FIN 46 in 2003. As of March 31, 2003, the Company had not become party to any new variable interest entities for which it was the Primary Beneficiary that would have resulted in the Company needing to consolidate the results.

6. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

              The Company owns certain operating properties and properties under development through joint ventures in which the Company is a co-general and co-managing partner. The Company also holds investments in certain retail joint ventures through MEI and a 60% interest in FoodBrand. The Company does not consider itself to be in control of joint ventures when major business decisions require the approval of at least one other general partner. Accordingly, the Company accounts for its joint ventures under the equity method.

              The Company calculates the equity in income or loss earned from its unconsolidated joint ventures based on its estimate of each partner's economic ownership which is estimated based on anticipated stabilized cash flows as they would be distributed to each partner. Generally, under the terms of the respective joint venture agreements, net ordinary cash flow is distributed to each partner first to pay preferences on unreturned capital balances, including cumulative unpaid preferences, and thereafter in accordance with residual sharing percentages specified in the joint venture agreement. Cash flow from capital events, including refinancing and asset sales, is allocated first to partners in an amount equal to their unreturned capital account and thereafter in accordance with residual sharing percentages. The Company's residual sharing and capital contribution percentages for each joint venture property at March 31, 2003, are as follows:

(1)

The Company's residual sharing percentage for Meadowlands Mills Limited Partnership will be 53.3% when the conditions to delivery of the executed joint venture documents from escrow have been satisfied.

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              Pursuant to the joint venture agreements, the Company is committed to providing certain levels of equity in addition to amounts invested to date. As of March 31, 2003, the Company has guaranteed repayment of $320,891 of joint venture debt. These guarantees generally exist until certain debt service coverage tests are met. In addition, the Company is contingently liable for property taxes and assessments levied against Ontario Mills Limited Partnership by the City of Ontario Special Assessment District ("City"). The remaining aggregate amount of the special tax assessment is approximately $11,956 and will be collected over the remaining 18-year period through 2020 to fund debt service on bonds issued by the City to fund the infrastructure improvements.

              The Company's real estate joint venture agreements contain buy-sell provisions whereby certain partners can require the purchase or sale of ownership interests among certain partners. Additionally, there are provisions whereby the Company has guaranteed its partner's preference until permanent financing is obtained. The Company generally guarantees a 9% preferred return on the equity balance of Kan Am, a joint venture partner in many of the Company's joint venture partnerships and long time private equity source to the Company.

              Condensed balance sheets at March 31, 2003 and December 31, 2002 and condensed results of operations for the three months ended March 31, 2003 and 2002 are presented below for all unconsolidated joint ventures including investments in certain retail joint ventures held by MEI and the 60% interest in FoodBrand.

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              The difference between the carrying value of the Company's investment in unconsolidated joint ventures and Mills LP's accumulated equity noted above is primarily due to the Company's increased basis as a result of acquiring interests in joint ventures whereby the purchase price was not allocated to the joint venture. Additionally, the difference is due to capitalized interest on the investment balance, capitalized development and leasing costs that are recovered by Mills LP through fees earned during construction, and loans to the joint ventures that are included in other liabilities. The difference is being amortized over 20 years.

              Significant accounting policies used by the unconsolidated joint ventures are similar to those used by the Company.

ACQUISITION OF JOINT VENTURE INTERESTS

              In June 2002, the Company completed the acquisition of all of the interest in Opry Mills held by its joint venture partner, Opryland Attractions, Inc. (a subsidiary of Gaylord Entertainment). As a result of the acquisition, the Company now holds 100% of the ownership interests in Opry Mills and consolidates the operations of the entity. Prior to the acquisition, the Company owned a 66.7% residual sharing percentage and a 66.7% capital contribution percentage. The net consideration paid by the Company was approximately $30,910 in cash. The Company paid the purchase price using a portion of the proceeds from the sale of its common stock in May 2002.

              In May 2002, the Company completed its acquisition of 50% of Simon Property Group's ("Simon") interest in Arizona Mills, with Taubman Centers ("Taubman") acquiring the remaining 50%, and of 75% of Simon's interest in Arundel Mills, Concord Mills, Grapevine Mills and Ontario Mills (collectively the "Acquired Properties"), with Kan Am, acquiring the remaining 25%. The Company has historically accounted for these assets using the equity method of accounting and continues to do so after the acquisition since major business decisions regarding these properties require the approval of at least one other general partner. The total consideration paid by the Company for the interests in the Acquired Properties was $124,480 in cash. The Company paid the purchase price using a portion of the proceeds from the sale of its common stock in May 2002.

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7. FINANCIAL INSTRUMENTS: DERIVATIVES AND HEDGING

              In the normal course of business, the Company and its joint ventures are exposed to the effect of interest rate changes. The Company and its joint ventures limit these risks by following established risk management policies and procedures including the use of a variety of derivative financial instruments to manage, or hedge, interest rate risk. The Company and its joint ventures do not enter into derivative instruments for speculative purposes. The Company and its joint ventures require that the hedging derivative instruments are effective in reducing the interest rate risk exposure. This effectiveness is essential to qualify for hedge accounting. Changes in the hedging instrument's fair value related to the effective portion of the risk being hedged are included in accumulated other comprehensive income (loss). In those cases, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Hedges that meet these hedging criteria are formally designated as cash flow hedges at the inception of the derivative contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, the change in the fair value of the derivative instrument is marked to market with the change included in net income in each period until the derivative instrument matures. Additionally, any derivative instrument used for risk management that becomes ineffective is marked to market through earnings.

              To manage interest rate risk, the Company and its joint ventures may employ interest rate swaps, caps and floors, options, forwards or a combination thereof, depending on underlying exposure. Interest rate swaps and collars are contractual agreements between the Company, its joint ventures and third parties to exchange fixed and floating interest payments periodically without the exchange of the underlying principal amounts (notional amounts). In the unlikely event that a counterparty fails to meet the terms of an interest rate swap contract or collar agreement, the Company's exposure is limited to the interest rate differential on the notional amount. The Company does not anticipate non-performance by any of its counterparties. Net interest differentials to be paid or received under a swap contract and/or collar agreement are accrued as interest expense as incurred or earned.

              Interest rate hedges that are designated as cash flow hedges, hedge the future cash outflows on debt. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars and forwards are cash flow hedges. The unrealized gains/losses in the fair value of these hedges are reported on the balance sheet and included in accounts payable and other liabilities or in investment in unconsolidated joint ventures (for joint venture hedges) with a corresponding adjustment to either accumulated other comprehensive income (loss) or in earnings depending on the hedging relationship. If the hedging transaction is a cash flow hedge, then the offsetting gains/losses are reported in accumulated other comprehensive income to the extent of the effective portion of the risk being hedged. Changes in the hedging instrument's fair value related to the effective portion of the risk being hedged are included in accumulated other comprehensive income (loss). Changes in fair value representing (1) the ineffectiveness of the hedging relationship and (2) any other component of fair value not related to the risk being hedged are recorded as interest expense through earnings. Some derivative instruments are associated with the hedge of an anticipated transaction. Over time, the unrealized gains/losses held in accumulated other comprehensive income (loss) will be recognized in earnings consistent with when the hedged items are recognized in earnings.

              In conjunction with the Company's policy to reduce interest rate risk, the Company, and its unconsolidated joint ventures, have entered into the following interest rate swaps to hedge the variability of monthly cash outflows attributable to changes in LIBOR.

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              The swaps require the Company to receive LIBOR and pay a fixed rate. A summary of the current and deferred start swap terms of the derivative instruments, a reconciliation of their fair values and adjustments to accumulated other comprehensive loss are as follows:

              Within the next twelve months, the Company expects to reclassify $3,285 from accumulated other comprehensive loss to earnings as interest expense and our unconsolidated joint ventures expect to reclassify $5,738 to earnings as interest expense from the balance held in accumulated other comprehensive income (loss), of which the Company's pro-rata share is $2,031.

              The Company's pro-rata share of accumulated other comprehensive loss after minority interest is $17,330 and $3,165 at March 31, 2003 and 2002, respectively. The Company's comprehensive income for the three months ended March 31, 2003 and 2002 was $17,704 and $11,839, respectively.

8. DIVIDENDS DECLARED

              On February 18, 2003, the Company declared a dividend of $0.5650 per common share which was paid on May 1, 2003 to stockholders of record as of April 18, 2003.

              On February 18, 2003, the Company declared a dividend of $0.5625 per share for the Company's Series B Cumulative Redeemable Preferred Stock for the period beginning February 2, 2003 and ending May 1, 2003, which was paid on May 1, 2003 to stockholders of record as of April 18, 2003.

              On February 18, 2003, the Company declared a dividend of $0.5625 per share for the Company's Series C Cumulative Redeemable Preferred Stock for the period beginning February 2, 2003 and ending May 1, 2003, which was paid on May 1, 2003 to stockholders of record as of April 18, 2003.

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9. CAPITAL STOCK

AUTHORIZED AND OUTSTANDING CAPITAL

              At March 31, 2003 and December 31, 2002, the total number of shares authorized and outstanding was as follows:

SALE OF SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK

              In January 2003, the Company sold an additional 100,000 shares of 9% Series C Cumulative Redeemable preferred stock in a public offering at an initial purchase price of $25.23 per share. The net proceeds, which totaled approximately $2,450 after expenses, were used to fund a portion of the purchase price of Cadillac Fairview portfolio. The Company contributed the proceeds to Mills LP in exchange for preferred units. The preferred units have economic terms substantially identical to the Series C Cumulative Redeemable preferred stock. The dividends on the preferred stock are payable quarterly in arrears at 9% of the liquidation preference of $25.00 per share (equivalent to $2.25 per share). The dividends are cumulative and commenced on December 17, 2002. The Company cannot redeem the Series C preferred stock before December 17, 2007 except to preserve its status as a REIT. On or after December 17, 2007, the preferred stock can be redeemed at $25.00 per share. Holders of the stock will have limited voting rights only if dividends are not paid for six or more quarterly periods and in certain other events.

EARNINGS PER SHARE

              The following table sets forth the computation of basic and diluted earnings per common share as of the three months ended March 31, 2003 and 2002:

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STOCK-BASED COMPENSATION

              In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure" ("SFAS No. 148"). SFAS 148 amends FASB Statement No. 123 "Accounting for Stock-Based Compensation", ("FASB No. 123") to provide alternative methods of transition to Statement 123's fair value method of accounting for stock-based employee compensation. Effective January 1, 2002, the Company adopted the fair value recognition provisions of FASB Statement No. 148 which amended FASB No. 123, prospectively to all employee awards granted, modified, or settled after January 1, 2002. This adoption had an immaterial impact to the results of operation for 2003 and 2002. Awards under the Company's plans vest over periods ranging from three to ten years. The cost related to stock-based employee compensation included in the determination of net income for the three months ended March 31, 2003 and 2002 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of FASB No. 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

10. MINORITY INTEREST

              Minority interest represents the interests of the common and preferred unit holders in Mills LP not held by the Company. The minority interest is adjusted at each period end to reflect the ownership percentage at that particular time. The minority interest was 27.09% and 27.32% at March 31, 2003 and December 31, 2002, respectively.

              Limited partnership units in Mills LP (16,220,361 and 16,237,425 outstanding as of March 31, 2003 and December 31, 2002, respectively) that were not held by the Company are exchangeable for shares of common stock of the Company on a one-for-one basis in specified circumstances. This exchange right has not been considered in the computation of per share data, as it does not have a dilutive effect. The common shares that become exercisable under the Series A Warrant have not been considered in the computation of per share data, as they are anti-dilutive for all periods presented. Certain options outstanding were not included in the computation of diluted earnings per share because, in the case of options, restricted stock and stock appreciation rights, the exercise price was higher than the average market price of common stock for the applicable periods and/or because the conditions which must be satisfied prior to issuance of any such shares were not achieved during the applicable periods, and therefore, the effect would be anti-dilutive.

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SALE OF 8.75% SERIES D CUMULATIVE REDEEMABLE PREFERRED PARTNERSHIP UNITS

              In March 2003, Mills LP sold 400,000 of 8.75% Series D Cumulative Redeemable Preferred Partnership Units in a private placement to two investors at a purchase price of $25.00 per unit. The net proceeds, which totaled approximately $9,900 after expenses, were used to reduce outstanding indebtedness under the Company's unsecured revolving loan. The Series D Preferred Units are exchangeable for the Company's Series D Cumulative Redeemable Preferred Stock on a one-for-one basis at any time after a registration statement covering such shares of preferred stock is declared effective by the Securities and Exchange Commission. Dividends on the preferred units are payable quarterly in arrears at 8.75% of the liquidation preference of $25.00 per unit (the equivalent to $2.1875 per unit). Series D preferred units may not be redeemed by Mills LP before March 26, 2008 and Series D preferred stock may not be redeemed by the Company before March 26, 2008 except to preserve its status as a REIT. On or after March 26, 2008, the Series D preferred units and the preferred stock can be redeemed at $25.00 per unit or shares, as applicable. Holders of units and holders of shares will have limited voting rights if dividends are not paid for six or more quarterly periods or in certain events. For the three months ended March 31, 2003, the proceeds from the sale of the Series D preferred units and the dividends made on the Series D preferred units are included in minority interest on the consolidated balance sheet and statement of income. On May 1, 2003 the Company paid a dividend of $2.1875 per unit for the three months ended March 31, 2003 prorated for the portion of the distribution period outstanding.

11. COMMITMENTS AND CONTINGENCIES

              The Company is subject to the risks inherent in the ownership and operation of commercial real estate. These risks include, among others, those normally associated with changes in the general economic climate, trends in the retail industry, including creditworthiness of retailers, competition for retailers, changes in tax laws, interest rate levels, the availability of financing and potential liability under environmental and other laws.

              As of March 31, 2003, the Company had outstanding letters of credit totaling $182 which were provided to certain utility companies as security for certain performance criteria.

              The Company currently is neither subject to any material litigation nor, to management's knowledge, is any material litigation currently threatened against the Company, other than routine litigation and administrative proceedings arising in the ordinary course of business.

              On March 27, 2003, Hartz Mountain Industries, Inc. ("Hartz Mountain") filed a lawsuit in the Superior Court of New Jersey, Law Division, for Bergen County, seeking to enjoin the New Jersey Sports and Exposition Authority (the "NJSEA") from entering into a contract with Mack-Cali Realty Corporation and the Company for the redevelopment of the Continental Arena Site. In a hearing on May 1, 2003, the Court ruled that no injunction should be issued, and that Hartz Mountain would be required to exhaust its administrative remedies through a protest filed with the NJSEA before bringing the issue to the Courts. The Company believes that its proposal fully complied with applicable laws and the request for proposals and the Company plans to vigorously enforce its rights concerning this project. The Company does not currently believe that this lawsuit will have any material affect on its ability to develop the project.

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12. NON-CASH INVESTING AND FINANCING INFORMATION

              In January 2003, the Company acquired 100% of the interests in five shopping centers from Cadillac Fairview for cash and the assumption of debt. The assets and liabilities acquired were as follows:

13. SUBSEQUENT EVENTS

SALE OF SERIES E CUMULATIVE REDEEMABLE PREFERRED STOCK

              In May 2003, the Company sold a total of 6,440,000 shares of 8.75% Series E Cumulative Redeemable Preferred Stock with a par value of $.01 per share for $25.00 per share in an underwritten public offering. The proceeds from the offering totaled approximately $155,554 after deducting underwriting discounts and expenses. The Company contributed the proceeds to Mills LP in exchange for preferred units. The preferred units have economic terms substantially identical to the Series E Cumulative Redeemable Preferred Stock. The net proceeds from the Series E Cumulative Redeemable Preferred Stock were used to repay a portion of the amounts outstanding under the Company's unsecured revolving loan and a portion of the amount outstanding under the Company's RBC credit facility. The dividends on the preferred stock are payable quarterly beginning in August 2003 at 8.75% of the liquidation preference of $25.00 per share (equivalent to $2.1875 per share). The Company cannot redeem the Series E preferred stock before May 5, 2008 except to preserve its status as a REIT. On or after May 5, 2008, the preferred stock can be redeemed at $25.00 per share. Holders of the stock will have limited voting rights if dividends are not paid for six or more quarterly periods and in certain other events.

OTHER EVENTS

              In conjunction with the acquisition of the Cadillac Fairview portfolio, the purchase agreement also provided for the Company's acquisition of Cadillac Fairview's interests in two joint ventures, each of which owns a property located in Atlanta, Georgia. On May 12, 2003, the Company completed the acquisition of Cadillac Fairview's 50% interests in the two joint ventures for an aggregate price of $62,500 of which the Company had previously paid a $5,000 non-refundable deposit.

              On May 1, 2003, the Company entered into an agreement to purchase an existing mall property in California for a purchase price exceeding $400,000. The agreement provides for closing to occur during or before the third quarter of 2003, and is subject to continuing due diligence review of the property and other conditions to closing. Accordingly, there can be no assurance that the Company will acquire the property. As part of the execution of this agreement, the Company has deposited $20,000 in escrow.

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THE MILLS CORPORATION
(Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

              Except as otherwise required by the context, references in this Form 10-Q to "we," "us," "our" and the "Company" refer to The Mills Corporation and its direct and indirect subsidiaries, including The Mills Limited Partnership, and references in this Form 10-Q to the "Mills LP" refer to The Mills Limited Partnership, of which The Mills Corporation is the sole general partner. The following discussion and analysis of financial condition should be read in conjunction with our unaudited financial statements for the three months ended March 31, 2003 and 2002 and our audited Consolidated Financial Statements and Notes thereto for the year ended December 31, 2002 included in our 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2003. Historical results set forth in the Consolidated Financial Statements are not necessarily indicative of our future financial position and results of operations.

              We conduct all of our business and own all of our properties through Mills LP and its various subsidiaries. As of March 31, 2003, we owned a 1% interest as the sole general partner in Mills LP and a 71.91% interest as a limited partner. We are a fully integrated, self-managed real estate investment trust ("REIT") that engages primarily in the ownership, development, redevelopment, leasing, acquisition, expansion and management of a portfolio of 13 super-regional retail and entertainment-oriented centers, ("Mills Landmark Centers"), seven regional retail and entertainment-oriented centers ("21st Century Retail and Entertainment Centers"), three community shopping centers ("Community Centers") and a portfolio of 19 single tenant properties subject to net leases that operate as CVS pharmacies ("Net Lease Properties"). In addition, Mills LP owns Mills Services Corp. ("MSC"), which was formed to provide development, management, leasing and financial services to entities owned by our affiliates. MSC owns 100% of Mills Enterprises, Inc., an entity that holds investments in certain retail joint ventures such as a 60% interest in FoodBrand L.L.C. ("FoodBrand"), the food and beverage entity that master leases, manages and operates food courts and restaurants at some of our properties and at two properties owned by third parties.

Critical Accounting Policies and Estimates

              Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to real estate and development assets, revenue recognition in conjunction with providing development, leasing and management services and equity in earnings of unconsolidated joint ventures. We believe the following critical accounting policies, among others, affect our more significant judgment of estimates used in the preparation of our consolidated financial statements.

Real Estate and Development Assets

              Costs related to the acquisition, predevelopment, development, construction and improvement of properties are capitalized. Interest, real estate taxes, insurance and other development-related costs, including certain direct and indirect costs incurred during the construction period, are also capitalized. Upon completion of development, all such costs are depreciated over the life of the related assets.

              Costs incurred during predevelopment are capitalized after we have identified and secured a site, determined that a project is feasible, and concluded that it is probable that the project will proceed. Mills LP has invested significant amounts of capital in several predevelopment projects. While we believe we will recover this capital through the successful development of such projects, or through other alternative opportunities and courses of action in the event that such development cannot proceed, it is possible that a significant write-off of unrecoverable amounts could occur. A material write-off could impact the financial condition of Mills LP, including its ability to comply with certain covenant tests under our various debt agreements. A material write-off could also impact our ability to obtain funding for future development projects.

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              We are actively pursuing acquisition opportunities and will not be successful in all cases. Costs incurred related to these acquisition opportunities are expensed when it becomes possible that we will not be successful in the acquisition.

              Income producing properties are individually evaluated for impairment when various conditions exist that may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis) from a property is less than its historical net cost basis. If a determination has been made that a permanent impairment has occurred we would record an impairment charge. In addition, we write off costs related to predevelopment projects when we determine that we will no longer pursue the project.

Revenue Recognition

              We, as lessor, have retained substantially all the risks and benefits of property ownership and we account for our leases as operating leases. Minimum rent from income producing properties is recognized on a straight-line basis over the terms of the respective leases. Percentage rent is recognized when tenants' sales have reached certain levels specified in the respective leases. Recoveries from tenants for real estate taxes and other operating expenses are recognized as revenue in the period the applicable costs are incurred.

              MSC has entered into agreements with the joint ventures to provide management, leasing, development and financial services for the joint venture properties. For management services, MSC is entitled to a percentage of rental revenues received by the joint venture property. For leasing services, MSC is entitled to an agreed-upon rate monthly per square foot of space leased that is recognized upon execution of a lease. For development services, MSC is entitled to an agreed-upon fee that is deferred during the predevelopment stage of the project and subsequently recognized ratably during the development period once a development agreement is executed. For financial services, MSC receives a fee equal to an agreed upon percentage of the total loan commitment that is recognized when a construction loan or permanent loan is committed by the lender. Costs incurred to provide leasing, development and financial services are capitalized when incurred and subsequently expensed as the fee is earned. Other fee income from affiliated joint ventures reflects the fees earned net of the estimated costs incurred to provide these services.

Investment in Unconsolidated Joint Ventures

              We do not consider ourselves to be in control of joint ventures when major business decisions require the approval of at least one other general partner. Accordingly, we account for our joint ventures under the equity method.

              We calculate the equity in income or loss earned from our unconsolidated joint ventures based on our estimate of each partner's economic ownership which is estimated based on anticipated stabilized cash flows as they would be distributed to each partner. Generally, under the terms of the respective partnership agreements, net ordinary cash flow is distributed to each partner first to pay preferences on unreturned capital balances (including cumulative unpaid preferences) and thereafter in accordance with residual sharing percentages as defined in the partnership agreement. Cash flow from capital events (including refinancing and asset sales) is allocated first to partners in an amount equal to their unreturned capital account and thereafter in accordance with residual sharing percentages.

Foreign Operations

              The U.S. dollar is the functional currency of our consolidated and unconsolidated entities operating in the United States. The functional currency for our consolidated and unconsolidated entities operating outside of the United States is the local currency of the country in which the entity is located.

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              Our consolidated subsidiaries whose functional currency is not the U.S. dollar translate their financial statements into U.S. dollars. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date and income statement accounts are translated using the average exchange rate for the period. However, income statement accounts that represent significant, non recurring transactions are translated at the rate in effect as of the date of the transaction. Gains and losses resulting from the translation are immaterial. We translate our share of the income of our unconsolidated entities when the functional currency is not the U.S. dollar at the average exchange rate for the period. For the three months ended March 31, 2003, the total net foreign currency exchange gain related to our unconsolidated joint ventures was $2.6 million of which our portion of $1.6 million was recorded in equity in earnings. We and our foreign entities have certain transactions denominated in currencies other than their functional currency. In these instances, nonmonetary assets and liabilities are reflected at the historical exchange rate, monetary assets and liabilities are remeasured at the exchange rate in effect at the end of the period, and income statement accounts are remeasured at the average exchange rate for the period. Gains and losses from remeasurement are included in our results of operations. Our foreign currency gain, net, totaling $2.3 million, arises primarily from the remeasurement of intercompany advances to unconsolidated joint ventures. In addition, gains or losses are recorded in the income statement when a transaction with a third party, denominated in a currency other than the functional currency, is settled and the functional currency cash flows realized are more or less than the exchange rate in effect when the transaction was initiated.

Financial Overview

              Fluctuations in our results of operations from period to period are partially affected by acquisitions, dispositions, new assets placed in service, and other business transactions generated from our pursuit to develop new shopping centers, expand existing shopping centers, and build on other retail alternatives that leverage our existing portfolio. The following is a summary of new shopping center openings, acquisitions and dispositions for the three months ended March 31, 2003 and 2002.

              For the three months ended March 31, 2003, the Consolidated Financial Statements and accompanying Notes reflect the consolidated financial results of four wholly owned shopping centers, three community centers, including The Marketplace at Arundel Mills which opened in January 2003, the equity in earnings of nine unconsolidated joint ventures, including Colorado Mills which opened in November 2002, 46 Net Lease Properties (27 of which were disposed of in March 2003 in the completion of the exchange transaction for Forest Fair) and the operations of MSC which accounts for its interest in FoodBrand and certain other retail joint venture investments using the equity method. Additionally, included in the consolidated financial results are the following new shopping center acquisitions.

•

In January 2003, we acquired 100% of the interests in five 21st Century Retail and Entertainment centers from the Cadillac Fairview Corporation Limited and various affiliated entities ("Cadillac Fairview"). The properties are located in Ft. Lauderdale, FL; Dover, DE; White Plains, NY; Jackson, MS and New Orleans, LA. In addition to the five properties, the Company acquired approximately 110 acres of developable land adjacent to the properties. The total aggregate purchase price for the five properties and the developable land adjacent to the properties was $546.6 million.

              In addition, we completed the following acquisitions in 2002, the results of operations for which are included in the statement of income for the three months ended March 31, 2003 but not included in the statement of income for the three months ended March 31, 2002 due to the timing of the acquisition.

•

In December 2002, we acquired 100% of Riverside Square, a regional shopping center located in Hackensack, New Jersey.



•

In September 2002, we acquired 100% of Forest Fair Mall located in Cincinnati, Ohio. This mall is currently under redevelopment and will be renamed Cincinnati Mills upon completion of its redevelopment.



•

In June 2002, we acquired the remaining 33.3% of Opry Mills that we did not already own from our partner, Opryland Attractions, Inc. (a subsidiary of Gaylord Entertainment). The operations of Opry Mills have been reflected in equity in earnings through June 30, 2002 and were consolidated thereafter.

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•

In May 2002, we acquired 50% of Simon Property Group's ("Simon") interest in Arizona Mills and 75% of Simon's interests in Arundel Mills, Concord Mills, Grapevine Mills and Ontario Mills. Taubman Centers ("Taubman") acquired the remaining 50% of Simon's interest in Arizona Mills and Kan Am acquired the remaining 25% of Simon's interest in the four other properties. The operations of these unconsolidated joint ventures continue to be reflected through equity in earnings at our increased ownership percentage commencing on June 1, 2002 through December 31, 2002 and our preacquisition ownership percentage during the period from January 1, 2002 through May 31, 2002.

              For the three months ended March 31, 2002, the Consolidated Financial Statements and accompanying Notes reflect the consolidated financial results of four wholly-owned shopping centers, including the Oasis at Sawgrass, two community centers, including Concord Mills Marketplace which opened in October 2001, the equity in earnings of nine unconsolidated joint ventures, including Discover Mills which opened in November 2001 and Opry Mills which became wholly owned in June 2002, 46 Net Lease Properties and the operations of MSC which accounts for its interest in FoodBrand using the equity method.

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Comparison of the three months ended March 31, 2003 to the three months ended March 31, 2002.

              Minimum rent for the three months ended March 31, 2003 increased $16.6 million or 64.6% as compared with the three months ended March 31, 2002. The increase was primarily due to the acquisitions of the Cadillac Properties in January 2003, Riverside Square in December 2002, Forest Fair Mall in September 2002 and the outstanding joint venture interests in Opry Mills in June 2002, all of which contributed $16.0 million of the increase. In addition to the acquisitions, new tenants and increased occupancy at Franklin Mills also contributed to the increase.

              Recoveries from tenants for the three months ended March 31, 2003 increased $9.2 million or 73.9% as compared with the three months ended March 31, 2002. The increase was due primarily to the January 2003 acquisition of the Cadillac Fairview portfolio, and the 2002 acquisition of Riverside Square, Forest Fair Mall and the outstanding joint venture interests in Opry Mills, all of which contributed $8.4 million of the increase. Also contributing to the increase was increased expenses at Sawgrass Mills, Potomac Mills and Gurnee Mills.

              Other property revenue increased $0.3 million or 9.1% to $3.9 million for the three months ended March 31, 2003 as compared to $3.6 million for the same period in 2002. The increase primarily reflects the additional property revenue from the acquisitions in 2003 and 2002, partially offset by lower termination fee income in 2003 compared with 2002.

              Management fee income from unconsolidated joint ventures for the three months ended March 31, 2003 increased $0.6 million or 23.1% as compared with the three months ended March 31, 2002. The increase is due to management fees generated by the opening of Colorado Mills in late 2002, an increase in occupancy at Arundel Mills and the acquisition of 75% of Simon's management fee interest in Arundel Mills, Concord Mills and Grapevine Mills in conjunction with our acquisition of Simon's interest in these centers. These increases are partially offset by the elimination of management fees earned from Opry Mills as a result of acquiring the outstanding interest in this joint venture in June 2002.

              Other fee income from unconsolidated joint ventures decreased $0.4 million or 31.2% to $0.8 million for the three months ended March 31, 2003 as compared to $1.2 million for the same period in 2002. The decrease is due to lower financing activities in 2003 when compared to 2002, partially offset by higher development fees related to development activity at Pittsburgh Mills and St. Louis Mills.

              Recoverable from tenants expenses for the three months ended March 31, 2003 increased $8.1 million or 76.1% as compared with the three months ended March 31, 2002. The increase was due primarily to the 2003 Cadillac acquisition, the 2002 acquisitions of Riverside Square, Forest Fair Mall and the outstanding joint venture interest in Opry Mills, all of which contributed to a combined $7.2 million to the increase. Additionally, recoverable expenses increased primarily due to an increase in tax expense at Sawgrass Mills and increases in snow removal expenses at Potomac Mills and Gurnee Mills.

              Other operating expenses increased $0.2 million or 16.1% to $1.6 million for the three months ended March 31, 2003 as compared to $1.4 million for the same period in 2002. The increase was due primarily to the 2003 Cadillac acquisition, the 2002 acquisitions of Riverside Square, Forest Fair Mall and the outstanding joint venture interest in Opry Mills.

              General and administrative expenses for the three months ended March 31, 2003 increased $1.0 million or 31.5% as compared with the three months ended March 31, 2002. The increase was due primarily to higher compensation related costs associated with the Company's growth and management restructuring in late 2002.

              Depreciation and amortization for the three months ended March 31, 2003 increased $6.6 million or 65.3% as compared with the three months ended March 31, 2002. The increase primarily relates to depreciation expense associated with the 2003 Cadillac acquisition, the 2002 acquisitions of Riverside Square, Forest Fair Mall and the outstanding joint venture interest in Opry Mills, all of which contributed $5.1 million to the increase. Additionally, depreciation and amortization expense increased due to placing new assets in services.

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              Equity in earnings of unconsolidated joint ventures decreased $0.9 million or 14.4% to $5.3 million for the three months ended March 31, 2003 as compared to $6.2 million for the same period in 2002. The decrease reflects lower land sale gains by the joint ventures of $4.4 million, partially offset by earnings from the opening of Colorado Mills in November 2002, our increased ownership in Arizona Mills, Arundel Mills, Grapevine Mills and Ontario Mills as a result of our acquisition of a portion of Simon's interest in these centers in May 2002 and a foreign currency gain which totaled $1.6 million during the 2003 quarter end.

              Interest income for the three months ended March 31, 2003 increased $1.2 million or 96.8% as compared with the three months ended March 31, 2002. The increase was due primarily to higher advances made to our joint ventures.

              Interest expense, net increased $1.4 million or 11.3% to $13.5 million for the three months ended March 31, 2003 as compared to $12.1 million for the same period in 2002. The increase primarily relates to interest expense associated with the 2003 Cadillac acquisition, the 2002 acquisitions of Riverside Square, Forest Fair Mall and the outstanding joint venture interest in Opry Mills, all of which contributed $6.7 million to the increase. Additionally, the increase reflects higher interest on our line of credit due to a higher average balance in 2003 as compared to 2002. These increases were partially offset by higher capitalized interest costs in 2003 as a result of increased development activity.

              Gain on foreign currency exchange, net was $2.3 million for the three months ended March 31, 2003, which was primarily due to the strengthening of the Canadian dollar against the U.S. dollar. Our investments and advances in our two foreign operations are denominated in the applicable local foreign currencies, which must be remeasured to our U.S. dollar currency for accounting purposes.

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Unconsolidated Joint Ventures

              We conduct our business through Mills LP, wholly owned subsidiaries and our affiliates. The consolidated financial statements include accounts of the Company and all our subsidiaries that we control. We do not consider ourselves to be in control of an entity when major business decisions require the approval of at least one other general partner. Accordingly, we account for our investments by joint ventures under the equity method. Because a significant number of our shopping centers are operated by joint ventures, we have expanded our management's discussion and analysis of financial condition and results of operations to discuss the results of operations of the unconsolidated joint ventures without regard to our pro rata share of these operations. The table below provides the income statement of the unconsolidated joint ventures for the three months ended March 31, 2003 and 2002 and is followed by a discussion of the unconsolidated joint venture results of operations:

The following is a summary of joint venture acquisitions and new joint venture shopping centers placed into operation for the three months ended March 31, 2003, and 2002:

              In May 2002, we, through Mills LP, completed our acquisition of 50% of Simon's interest in Arizona Mills and 75% of Simon's interests in Arundel Mills, Concord Mills, Grapevine Mills and Ontario Mills. Taubman acquired the remaining 50% of Simon's interest in Arizona Mills, and Kan Am acquired the remaining 25% of Simon's interest in the other four properties. The total consideration paid by us for the interests in those properties was approximately $124.5 million in cash. The cash portion of the purchase price was funded by our equity offering of 7.5 million shares of common stock which closed in May 2002.

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              All of the acquired interests are in operating assets, and as follows (noting the percent interest to be acquired by the Company):

•

Ontario Mills, Los Angeles, CA (25% interest from Simon)

•

Grapevine Mills, Dallas, TX (37.5% interest from Simon)

•

Arizona Mills, Phoenix, AZ (13.2% interest from Simon)

•

Concord Mills, Charlotte, NC (37.5% interest from Simon)

•

Arundel Mills, Baltimore, MD – Washington D.C. (37.5% interest from Simon)

              In June 2002, we acquired the interest in Opry Mills that we did not already own from our partner, Opryland Attractions, Inc. (a subsidiary of Gaylord Entertainment). With this acquisition, we now own 100% of Opry Mills. The total consideration paid by us was approximately $30.9 million in cash. The cash portion of the purchase price for the Opry Mills transaction was funded by our equity offering of 7.5 million shares of common stock which closed in May 2002.

              In November 2002, we opened Colorado Mills located in Denver, Colorado. Colorado Mills is a 1.1 million square foot super-regional retail and entertainment center. Our partners in this joint venture are Kan Am and Stevinson Colorado Mills Holding.

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Comparison of the three months ended March 31, 2003 to the three months ended March 31, 2002 for the unconsolidated joint ventures without regard to our pro rata share of these operations.

              Minimum rent for the three months ended March 31, 2003 did not materially change when compared with the three months ended March 31, 2002. The minimum rent activity during the three months ended March 31, 2003 reflects the results of the operations for Colorado Mills which opened in November 2002, and increased minimum rent at Ontario Mills, Arundel Mills, the Marketplace at Arundel Mills and Grapevine Mills, primarily due to occupancy. Offsetting this increase is a loss in minimum rent from Opry Mills as a result of consolidating this entity subsequent to our acquisition of the remaining interest in Opry Mills that we did not already own in June 2002.

              Recoveries from tenants for the three months ended March 31, 2003 increased $1.3 million or 7.2% as compared with the three months ended March 31, 2002. The increase primarily reflects operations for Colorado Mills which opened in November 2002, partially offset by the consolidation of Opry Mills following our acquisition of the portion of the joint venture that we did not previously own in 2002. Additionally, increased expenses throughout the portfolio contributed to the increase.

              Other property revenue increased $0.3 million or 8.5% to $4.4 million for the three months ended March 31, 2003 as compared to $4.1 million for the same period in 2002. The increase primarily reflects other property revenue from operations for Colorado Mills which opened in November 2002, increased kiosk, temporary tenants and push cart income at Concord Mills and Arizona Mills, partially offset by the consolidation of Opry Mills following our acquisition of the portion of the joint venture that we did not previously own in 2002.

              Recoverable from tenants expenses for the three months ended March 31, 2003 increased $0.9 million or 5.4% as compared with the three months ended March 31, 2002. The increase reflects results from the opening of Colorado Mills in November 2002 and increased security and insurance expenses throughout the portfolio primarily due to terrorism. These increases were partially offset by the reduction in recoverable expenses as a result of consolidating Opry Mills in 2002.

              Other operating expenses decreased $0.1 million or 3.2% to $3.9 million for the three months ended March 31, 2003 as compared to $4.0 million for the same period in 2002. The decrease reflects the reduction of expense as a result of consolidating Opry Mills and lower landlord contribution to the marketing fund throughout the portfolio. These decreases were partially offset by increased expenses from the opening of Colorado Mills in November 2002 and moderately higher bad debt expense.

              Depreciation and amortization for the three months ended March 31, 2003 decreased $0.2 million or 0.7% as compared with the three months ended March 31, 2002. The decrease is due to the reduction in depreciation expenses as a result of consolidating Opry Mills in 2002 and assets becoming fully depreciated at Grapevine Mills. Partially offsetting the decrease was additional depreciation and amortization as a result of placing Colorado Mills in service in November 2002.

              Interest expense, net decreased $0.8 million or 3.7% to $20.4 million for the three months ended March 31, 2003 as compared to $21.2 million for the same period in 2002. The decrease is primarily from the consolidation of Opry Mills following our acquisition of the remaining interest in this entity in 2002. Offsetting the decrease is higher interest expense for Colorado Mills as a result of opening this center in November 2002, higher interest for Concord Mills due to its refinancing in the fourth quarter of 2002, and higher interest for Discover Mills due to a higher average principal balance in 2003 as compared to 2002.

              Other income (expense) decreased $5.1 million or 88.0% to $0.7 million for the three months ended March 31, 2003 as compared to $5.8 million for the same period in 2002. The decrease reflects lower gains from the sale of land as 2002 reflects substantial land sale gains at Colorado Mills, Discover Mills and Arundel Mills.

Cash Flows

              Net cash provided by operating activities increased $23.6 million to $32.8 million for the three months ended March 31, 2003 as compared with $9.2 million for the three months ended March 31, 2002. This increase resulted from increased operational income and the added accrued expenses and other liabilities assumed from the acquisition of the Cadillac Fairview properties partially offset by the timing and increased collections of accounts and notes receivables.

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              Net cash flow used in investing activities increased $470.3 million to $522.0 million for the three months ended March 31, 2003 as compared with $51.6 million for the three months ended March 31, 2002. Cash used in investing activities increased primarily due to the acquisition of the Cadillac Properties ($478.0 million) in January 2003. The increase was also due to increased development expenditures for Cincinnati Mills, Potomac Mills and Gurnee Mills and contributions to unconsolidated joint ventures for the development of Colorado Mills, Madrid Xanadú and St. Louis Mills, in addition to increased predevelopment expenditures for Vaughan Mills, Meadowlands Xanadu, and various other projects in the predevelopment stage. These increases were partially offset by increased distributions received from unconsolidated joint ventures due to increased operating cash flows.

              Net cash flow provided by financing activities increased $386.4 million to $425.9 million for the three months ended March 31, 2003 as compared to $39.5 million for the three months ended March 31, 2002. The increase was primarily related to an increase in borrowings on our unsecured revolving loan as well as the new $320.0 million mortgage obtained for the acquisition of the Cadillac properties and increased development activity. This increase was partially offset by the refinancing of Potomac Mills and Gurnee Mills in the first quarter of 2002. Net cash flow provided by financing activities also increased due to the issuance in 2003 of Series D Cumulative Preferred Units and Series C Cumulative Preferred Stock which combined raised net proceeds of $12.5 million as compared to the secondary public offering of common stock in February 2002 which raised net proceeds of $47.0 million. Also contributing to the increase in financing activities was repayments related to the refinancing of Potomac Mills and Gurnee Mills in 2002, an increase in restricted cash and an increase in the proceeds from the exercise of stock options, partially offset by higher dividends as a result of our equity offerings.

Funds From Operations

              We believe that Funds From Operations ("FFO") is a useful supplemental measure of our operating performance that is a recognized metric used extensively by the real estate industry, in particular, REITs. Accounting for real estate assets using historical cost accounting under generally accepted accounting principles ("GAAP") assumes that the value of real estate assets diminishes predictably over time. The National Association of Real Estate Investment Trusts ("NAREIT") stated in its April 2002 White Paper on Funds from Operations "since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." As a result, the concept of FFO was created by NAREIT.

              FFO, as defined by NAREIT, means income (loss) before minority interest (determined in accordance with GAAP), excluding gains (losses) from sales of depreciated property, plus real estate related depreciation and amortization after adjustments for unconsolidated partnerships and joint ventures. Our FFO has been modified from the NAREIT's definition of FFO to exclude all foreign currency exchange gains/losses. This exclusion of foreign currency exchange gains/losses is consistent with the objective of presenting our FFO on a comparable basis with prior periods. In addition, we believe that such exclusion enables us to present our FFO on a comparable basis with other REITs that do not have foreign operations that would result in foreign currency exchange gains/losses. Even with this adjustment, our method of calculating FFO may be different from methods used by other REITs and accordingly, may not be comparable to such other REITs.

              FFO is presented to assist investors in analyzing our performance and to provide an indication of our ability to fund capital expenditures, distribution requirements and other cash needs. FFO (i) does not represent cash flow from operations as defined by GAAP, (ii) is not indicative of cash available to fund all cash flow needs and liquidity, including the ability to make distributions, and (iii) should not be considered as an alternative to net income (which is determined in accordance with GAAP) for purposes of evaluating our operating performance. The SEC requires registrants to identify the most comparable GAAP measure when using a non-GAAP measure. Net income is considered to be the most comparable GAAP measure to FFO.

              FFO available to common stockholders for the three months ended March 31, 2003 increased by $12.0 million (35.3%) to $46.1 million as compared to $34.1 million for the comparable period in 2002. Preferred dividends for our Series A Cumulative Convertible Preferred Stock is being treated as interest expense. The dividends on our Series A Cumulative Convertible Preferred Stock recorded as interest expense was $2,036 for both the three months ended March 31, 2003 and 2002.

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              A reconciliation of income before minority interest to FFO available to common stockholders (denoted in thousands) is presented below:

EBITDA

              Our Earnings Before Interest, Income Taxes, Depreciation and Amortization ("EBITDA") is defined as earnings of Mills LP, before interest expense, taxes, depreciation, amortization and certain other non-cash extraordinary items (including gains or losses on sales of real estate assets). EBITDA does not represent cash flows from operations as defined by GAAP and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. We believe that EBITDA is an important measure of performance for a REIT because EBITDA is unaffected by the debt and equity structure of the property owner and it also provides a further tool to evaluate our ability to incur and service debt and to fund dividends and other cash needs. The EBITDA measures presented by us may not be comparable to other similarly titled measures of other companies. We believe that net income is the most directly comparable GAAP measure to EBITDA.

              Our EBITDA to interest expense coverage ratio (including our proportionate share of interest expense and depreciation from our unconsolidated joint ventures) was 3.7 and 3.0 for the three months ended March 31, 2003 and 2002, respectively. A reconciliation of income before minority interest to EBITDA (denoted in thousands) is presented below: