Macerich's roundtable presentation, and I'm Lizzy Doykan . I work with Jeff Spector covering the retail REITs at BofA. With us today, we have Scott Kingsmore, CFO, and Doug Healey, Senior Executive Vice President and Head of Leasing. So we'll turn it over to Scott and Doug first to kick it off with some opening remarks, and then we can open it up to Q&A. And we like to make this interactive, so please feel free to jump in at any time with questions.
Great. Well, good afternoon. I'm Scott. He's Doug. Macerich has been a public company since 1994. We own a portfolio consisting of 44 primarily A-quality regional and town centers. Our portfolio is about 47 million sq ft, situated within highly desirable bi-coastal markets and in Phoenix. Very positive demographics support our portfolio. Our assets average over $850 a foot, with about 92% of our NOI coming from assets generating over $500 a foot, which is generally the line of demarcation for A-quality and better. Our business has shown incredible resilience since reopening following the pandemic a few years ago. We've recovered over 4% of our lost 5% of occupancy in just over two years.
This has been driven by really an incredibly strong leasing demand, first in 2021 following the pandemic, then in 2022, and now, so far, year to date in 2023. In fact, 2022 was our strongest leasing year, dating back 15 years since before the great financial crisis. And through the first half of this year, we've already leased a third more space than we did in the first half of 2022. So we're off to an excellent start, and our view is leasing demand has not abated, has not checked whatsoever. As we continue to reiterate, what's really exciting, not just the demand, it's the breadth and the array of new and diverse uses that we're doing business with, which is really clearly unrivaled in our company's history.
Given this demand, we continue to see a tremendous opportunity to add value to our portfolio through diversifying our tenant mix, as well as to fortifying our existing assets by densifying them with mixed uses. We see a tremendous opportunity to consolidate market share. We're seeing that certainly over the last couple of years, especially within our top 20 assets. For those that may not have seen earlier today, we were pleased to announce the culmination of a $650 million new credit facility, which closed yesterday. That facility is nearly 25% larger than the prior facility. It provides us an important $125 million liquidity boost over the existing $525 million facility, and it matures in four and a half years through early February of 2028.
We are very grateful for the continued strong support of our closest lending relationships to accomplish that closing. So in today's banking market, suffice to say, we're extremely pleased. Today we're trading at less than $12 a share. We remain extremely undervalued, with an implied cap rate of 8.5% and a trading multiple of about 6.5x. Over the last 22 years, as a frame of reference, our average trading multiple has been double that, at 13x. This, despite the fact that our business is on extremely firm footing. For every $1 invested today into our company, the free cash flow return on that equity is about 11%, with roughly half of that being paid in a dividend that's just over 5.5% dividend yield.
There remains a very, very strong value proposition from investing in MAC today and investing in best-in-class, A-quality retail. With that, I'll turn it over to you, Lizzy.
Great. Well, thanks. Thank you very much for the opening comments. And again, if anyone has any questions, feel free to raise your hand. I guess let's start with, you know, leasing and demand year to date. You commented kind of through the first half of 2023, just to confirm, at least as, you know, through September, you know, has that, you know, demand continued through the summer? Are you seeing any pockets of weakness or slowing in demand?
Thanks, Jeff. I'll take that one. No, the short answer is we're not seeing any decrease in demand. In fact, we're actually seeing the opposite. As I like to say, you know, we talk about all the leases that we signed and the leasing volumes that we've been reporting, and they're unprecedented, and last year was a record year. This year, we're ahead of last year, but that's kind of looking in the rearview mirror. You know, what's really telling about the future is what we see in our leasing committees every two weeks. The deals that we approve, that will go to lease, that will get signed, that will open and start paying rent, that's really the future. That really represents the demand.
Quite frankly, we're probably 20% ahead of where we were last year, and we don't see it letting up anytime soon.
That's just to confirm, you're talking about your... This is, in the leasing committee, you're saying that the deal pipeline or the total square footage or the deal pipeline, the number of deals is 20% higher?
It's about 20% more square footage-
More square footage.
that we've approved so far this year
Got it.
Relative to the same time last year. So kind of tracks the leasing volumes in terms of executed deals. Both our executed business, as well as the business that we're sending to lease, is significantly up versus last year.
That demand, is it across all 44 properties? Or again, as you talked about, kind of the, you know, A versus B, and, you know?
Well, fortunately, most of it is A. Again, 92% of our assets are over $500 a foot. So, I would say, there's certainly a significant concentration of demand within our top 20, top 25 assets. But we do see it, fairly across the board, within the portfolio. And again, the demand is from such a different echelon, a different mix of uses relative to what we have, experienced in the past. Really, I think kind of the view is we're creating a much more durable property, given the diversified type of uses. We're talking about everyday uses, ranging from grocery, to fitness, to co-working, to medical.
These are all different reasons for somebody to show up at our doorstep, relative to where they were, say, 10 years ago, when it was a discretionary dollar that was coming in the door to spend on apparel. Today, it is lifestyle uses. It is everyday uses. It is social uses. And so, again, it's a much more durable and resilient type of tenant base, which is, I think, very, it's fundamentally different. It's very exciting.
Well, I think that's a great point because... And I think it's one of the things that is really fueling the continued demand, is we've never seen the depth and breadth of uses that we have out there today. If you think about emerging brands, digital brands, grocery, as Scott mentioned, fitness, entertainment, medical, you know, they all want to be on our campuses. And I think that has a lot to do with what we've seen in the past, but more importantly, the continued demand that we see.
To confirm, on the grocery side, are they looking to, you know, open at the mall, or are we strictly talking about more of the, let's say, you know, open-air centers that you have?
Oh, it's on a mall. It's open air. It's freestanding. It's attached to the property. We are repurposing, in certain instances, department store boxes that will contain an entire level of grocery. And then on the other level, it may contain an entirely different, diverse use. So it really kind of runs the gamut. And when you think about where our space is headed, and I talked a little bit about densification earlier, where we may add residential to our campuses, let's say, you can imagine grocery is an extremely complementary use, as is high-end fitness to residential. It is an amenity that renters will pay a premium for. And so I would only see, you know, the intensity of our grocery uses only getting stronger. We looked at this across the portfolio. We've got, again, 44 assets.
16 of our assets, which represents about a third of our portfolio NOI, have grocery on the campus, either as a primary use or as a secondary use, say, a Target or a Costco. Certainly, there's an intense grocery element there. It may not be the primary use, but 16 of our 44 assets, roughly a third of our portfolio NOI, does have grocery on its campus. And people that want to say, "Okay, well, a mall is this, and a power center is this," that's fundamentally, you know, patently kind of false, in that, you know, we all kind of play in the same space. And if it's high-quality retail, if it's high-quality real estate, uses are going to land there, regardless of what tradition may say.
I assume it's frustrating that the open-air center landlords keep talking about tenants-
They're stealing our tenants.
Yeah.
I, uh-
I mean, that, that's just simply not true.
Yeah.
I'll give you a perfect real-life example. At Danbury Fair, that we own in Connecticut, Danbury, Connecticut, we just announced a Target. Now, where does Target normally go? You would think conventional wisdom would say to outside power center. They're coming to our mall, taking over half of Sears. We have Barnes & Noble and Five Below that are currently across the street in a power center, moving over to our enclosed shopping center. So to me, these retailers, and they'll tell you this, they're gonna go to the best real estate. And if you have the best real estate in the market, you're going to attract them. And if you don't, yeah, they may go to a power center or a strip center. But you're gonna find that more in tertiary markets, not the markets you find us in.
Can you talk about your store opening plans more so in the near term, especially with all the recent retailer earnings reports and maybe the softer discretionary spend that we've seen?
Well, again, I you know, back to my prior comment, about discretionary versus non-discretionary, I would argue that especially in better-heeled demographics, such as our markets, that fitness is not discretionary, that that's part of somebody's lifestyle, and they're gonna maintain that fitness membership on balance, even when times are difficult. They're gonna maintain that experience of going out and dining and just enjoying the social aspect of being out. They may spend a little bit less in terms of traditional mall product, but there are many different things, including grocery, including medical, that are now served on our campus, that will keep bringing them back. So I would say it's much less about discretionary versus just the variety of uses that are present on the campuses.
The exciting thing is, we don't see store openings abating. In fact, the neat thing is all these deals that we've done in 2021 and 2022 to repurpose obsolete department store space are now opening. We see, for instance, in the next three weeks, we'll have an opening of Scheels . And I can't quote the volumes that they expect, but let's just say that they are significant, and they will draw from the entire city of Phoenix. I'm not talking about a region. I'm not talking about a, a little, you know, five-mile ring. I'm talking about the entire city of Phoenix will shop at this store, which brings a lot of footfall to our doorstep. So huge regional draw there.
... absolute depiction of a game-changing type of use. We just opened up Target at Kings Plaza here in Brooklyn. Very successful opening. We're excited that Target is coming to Danbury Fair in Connecticut next spring. In about two weeks, we'll open up our third Life Time Fitness club at Broadway Plaza in Walnut Creek, and that follows a successful opening at Scottsdale Fashion Square earlier this year. So, you know, all this work to bring these uses, not only are we excited about the cash flow, I'm a CFO, I love the cash flow, but we're really excited about the sales and the traffic that these uses will bring, and there's just countless examples, and we're starting to see those uses start to open now, which is great.
Can we turn to luxury and maybe tie in Scottsdale Fashion and the latest update there? But you know we just given I think you and and Simon both reported lower sales per square foot citing you know tough luxury comps. You know there's been some concern on luxury and then you know luxury demand to open stores their concepts opening stores. Any change from luxury tenants?
So, you can jump in, Scott, but, yeah, they were very, very tough comps to comp against 2021, 2022. But it doesn't seem to affect the demand. Now, granted, we don't play in that space very much. We have Scottsdale Fashion Square for the most part. But if demand is any indication, you know what we did with the Neiman's wing, it was about 150,000 sq ft, which we transformed into luxury and global luxury, but the demand continued. And so now we're doing the exact same thing in the first level of the Nordstrom wing. And we'll add about another 80-ish thousand sq ft, 50,000 sq ft of... which is already committed. And that all started with, Hermès, which is a leader in the global, luxury category.
We announced them, and then it just, it's continued. So in our little world of Scottsdale, we haven't seen the demand let up at all, notwithstanding the sales.
I think you guys came out with a recent update on seeing men's luxury expand, or are there any other noteworthy retailer trends like this? Or how much of that is... do you see as a, a tailwind to luxury?
That's, that's an interesting comment. I think I talked about that in a recent release, and we've seen it with Louis Vuitton, Louis Vuitton Men. We've seen it with Dior. We've seen it with Saint Laurent. But I don't think that's just... It's not just luxury. We're starting to see it in all different categories, and I think it all starts with, you know, men's fashion has changed dramatically. It's gone from really traditional tailored suits. I think COVID had a lot to do with that, work from home. But, you know, you look at the Millennials, and you look at the Gen Zs, and they dress totally different. They're much more about fashion, and I think we're starting to see that. And some traditional retailers that were really women only have gone into the men's category.
Just a couple of them, like Lululemon, for example. Walk into a Lululemon store, half of it now is men's. Madewell, which was traditionally all women's, you know, a third of it now is men's, and that list continues. But I think it all stems from the way that men are dressing these days, and it's probably more so than the change in women.
Let's maybe focus then on some of the metrics, occupancy, leasing spreads. Can you talk about, you know, progress made year to date and what guidance implies? And you've had, you know, healthy, strong leasing spreads, I think, you know, nearly doubled in 2Q to over 11%.
Yeah, so we-- again, you know, part of that is you gotta rebuild the occupancy following the economic shock, which we've successfully done. We lost roughly 5% of our occupancy during the pandemic, and we've restored over 80% of that in about nine quarters. So great progress on that front. When we got to that... You know, today we're hovering around 93% occupancy in our portfolio. When we got to that kind of 92 band, we really kind of put the charge with the team to start pushing on rate. And, say, over the last five-six quarters, we've seen a decent spread growth ranging in the mid- to high-single digits. And fortunately, in the last quarterly release, over the last 12 months, we reached 11% rental spread.
So, as I look forward, I think, decent rent spreads in the high single digits to low double digits are reasonable expectation for us. I do see that given the continued demand, I think we'll get to, you know, 94% or so occupancy by the time we get to the end of next year. That's not guidance. That's just reading the tea leaves based on what we see today. And, you know, again, as occupancy improves, you can really push on rate because you do have competition for space, and that really is fundamentally the thing that's gonna help you push on rate. So, I feel very good about, you know, where the, where the metrics are at today.
What about the quality of the leases? We get that question a lot. You know, how would you compare the quality of the lease today versus, you know, pre-pandemic?
Much better. And again, a lot of that's driven by the healthier retail environment. You know, our, our watch list today is significantly less than what it was heading into the pandemic. And, you know, let's face it, there was a lot of failure that occurred during the pandemic, whether it was failed brands and/or failed balance sheets. We took, we took our lumps, and today, we do have a watch list. We always will, but it's significantly less. And so, you know, given that positive backdrop, given the relatively low incidence of bankruptcies over the last two and a half years, I feel, I feel very good about it, where we stand right now and, and our ability to just, you know, continue to drive rate and to drive occupancy.
And part of this too, is going to be improving the quality of occupancy. You know, as we get that total up towards the mid-90s, we also have an elevated level of temporary occupancy with local merchants, and they are an important, important merchant to us. But today, that's about 8.5% of our occupancy total, and, ideally, that would be somewhere around 4% or 5%. So what that means is part of the challenge ahead and part of the internal growth drivers for our, our NOI stream, is to convert that temporary tenancy to permanent. That will result in a doubling of rent, if not more. So, you know, it's not just getting occupancy up, it's also driving rate from temporary uses to better heeled, better credit, national names.
What was the peak on temporary?
Well, we're sitting about 8.5 today, and I would say, in the fullness of time, probably a good number is four-five. So we have a good 300-400 basis points of occupancy quality improvement.
The 8.5 is the high in the-
It's-
I didn't know if it was higher during the pandemic at one point or no?
No, no.
Okay.
I mean, you know, pandemic, I think everybody was struggling, especially the locals, right?
Okay.
Yeah. So no, this is a high watermark for us, and we've got some room to improve there.
Okay.
Which will be a nice driver.
And again, just to confirm, the leases-
Mm-hmm.
and the quality of the leases, just to confirm the terms today, are we back to normal terms?
Very much.
Yeah, okay.
Very much back to normal. Sorry for missing that part of the question.
No.
Very much back to normal. A fixed lease structure with annual bumps on base rent, annual bumps on our fixed CAM. Our fixed CAM bumps by 4%-5% a year. Our base rent bumps by 2%-3% a year. So very much normal leases. TI packages are not dissimilar to what they've been historically. We are traditionally pretty stingy about TIs, but if it's a difference-making tenant, we'll certainly, we'll certainly pay the capital.
In terms of the lease negotiation, is the negotiation still surrounded on the, the sales per square foot, the sales generated within the four walls? Is there... Has it moved past that at this point?
Great question. More and more so, it has moved past that. I mean, look at the retailers are always gonna be concerned, or we're gonna be concerned about what they're selling out of their four walls, but it doesn't really dictate the rent that they can pay. Because if you think about buy online, ship from store, buy online, pick up from store, buy online, return to store, you know, we're not capturing that in the sales volumes. So less and less, it's becoming about what a tenant can, quote, unquote, "afford" in terms of cost of occupancy, but more about what market rent looks like and how important that real estate or that address is to that retailer in the marketplace. And we all know that, you know, these now they're multi-channel.
Their bricks and mortar and their online platforms complement each other. So, you know, they need to keep these stores in certain markets to maintain their online business. You just can't capture that in cost of occupancy anymore. So of course, we look at it, but we don't live and die by it.
Okay. Maybe just turning quickly to the expense side, just because it's been such an issue in some other real estate sectors. Anything on the expense side that we should be aware of as, you know, we've kind of progressed through 2023, and we head into 2024, that impacts, you know, your bottom line?
Well, again, we are a fixed CAM shop, and I would say with the exception of perhaps 2021, 2022, and this year, we were dealing with an extremely low inflationary environment, pretty easy to contain operating costs. So over the course of that period, you know, we're booking, you know, fixed CAM increases of 4%-5%. We probably had 1%-2% expense growth. So it was an easy environment to actually create some cushion and some profit there. You know, operating expenses are certainly elevated to where they were, say, five years ago, and that's a function of wage pressure. It's a function of, in certain markets, not across the board, but in certain markets, increased scope on security for all the issues that we're all aware of.
It's a function of increased insurance costs. Insurance is an extremely hard market, and while that's not a big gross dollar portion of our expense profile, it is a very hard cost to contain in an environment where Mother Nature rears her ugly head every week, right? So, you know, on balance, you know, we would expect expenses to probably tick up 3%, 3.5% next year. That may not sound like a lot, but it's elevated relative to where we've been in the past.
Just to confirm on real estate taxes, that's outside of the CAM?
Correct. Yeah, generally, taxes are a direct pass-through. And you know, at any point in time, we're appealing, you know, probably two dozen valuations across our portfolio. So I think on balance, we've done a really good job of, you know, managing our tax line item, which is our biggest property expense by far.
Can we turn to the balance sheet? And maybe if you can discuss more about how you plan to address your upcoming maturities in 2024. We've seen some more, you know, CMBS small lending activity, and which is encouraging, so-
Yep.
Just if you could give the latest on that.
Sure, sure. Well, again, we addressed a big 2024 maturity in our line of credit. That was due to renew in April, and I'm very glad to stay in front of that and get in front of it and accomplish what we did today. By the way, that's our only recourse debt, you know, to the company. Everything else we have is secured non-recourse debt, so a distinct structural advantage in that financing structure. I'm pleased to say that, you know, and I couldn't say this for about the last five quarters. I'm pleased to say that the financing markets are certainly getting more stable, and they're opening up. I couldn't say that even a quarter ago.
In the spring of 2023, we're still dealing with some uncertainty as to where the Fed was headed and what the pace of increases or slowdown or pause was going to be and when. And then, most importantly, we were on the heels of a regional banking crisis, which, you know, certainly caused the second quarter volumes within CMBS to be almost at a historic low. So here we are in September, and over the last three and a half months, we've had about $3 billion of mall transactions get executed. We are very active in the markets today, financing a couple assets without getting into details, subject to negotiation. I feel very good about where we stand.
I think by the time we get to December 31, you'll be somewhat blown away about the amount of liquidity that is available for A-quality retail. There's an awful lot of transaction flow, and it's coming from us, it's coming from Simon and Brookfield and Westfield, and really great assets that are being financed today. So, the bond investors in CMBS are very willing to extend to the best quality retail. So, 2024, I don't anticipate any issues. We're again, we're transacting on two of those deals right now. We just addressed our line of credit maturity. As I look at our 2024 maturities, we've got some really high-quality assets that are maturing, ranging from $600 a foot to over $1,700 a foot in performance.
They're very well situated from a leverage standpoint, strong debt yields. I think incrementally, we'll pull cash out of those financings. So I feel good about where we stand today. And again, I'm pleased to say, and maybe if there's wood up here, I would knock on it, but I'm pleased to say I can actually say the markets are back open and functional, right now.
What is target net leverage by the end of next year again, and how does that, this whole strategy fit into, you know, reducing leverage to that target?
Sure. Our target leverage, our forecast for leverage, is 8 x by the end of 2024. That's really gonna be a function not of transactional activity, where we're not going to issue equity at $12 a share. It's a function of NOI growth. It's the huge pipeline that we've got that will start to pay rent this year and into next year. It's all the leasing demand that we've been, you know, fortunately talking about here. It's occupancy growth. It's all of that. So it's really organically reducing leverage through EBITDA growth, is what we see over the next 12 months. You know, we will continue to, when opportunity presents itself, sell assets. We haven't done a lot of it lately.
We sold a couple of power center assets in Phoenix, which really, I would say, are more of cleaning up the portfolio and simplifying our structure a bit. But, you know, at some point in time, the financing markets are going to get stable over a period of time, and I think there will be an opportunity to dispose of assets that we consider non-core. We're not going to put a portfolio out there, but we will transact opportunistically.
I assume non-core are the ones below the 500, or?
I wouldn't even say that, Jeff.
Okay.
You know, there are, there are assets that you could say, well, why would you sell that? It's because it may not be a core market for us. It may be an asset that we don't think there's a lot of ability to redevelop and intensify and do some of the things we've been talking about here. We have better opportunities for our capital elsewhere and a better return horizon on certain assets. So, you may see us sell some assets that you would say, "Well, geez, you've got such a great presence in that market. Why did you do it?" Well, it made sense. It made sense. And so we'll wait for the right time, though. You know, it's just not the right financing climate for that today.
But deals are happening. Let's say, deals are happening. I think you said $3 billion.
Mm-hmm.
So you're saying that these sellers may be a little bit more stressed, and so you're, you know, you don't need to sell, is that?
Well, this is all recent activity over the course of the last three months, and I think you need to see a bit of a sustained environment where liquidity is there. I think you probably need to see a little bit of rate cutting from the Fed in order to promote some of these transactions. Granted there's liquidity today, I think the financing market needs to improve a little bit for disposition activity to really open up.
On the refis, I guess, you know, your comment that the market has opened up.
Mm-hmm.
I guess, you know, when you think about, and I know at the Investor Day, you laid out, you know, property, I think it was property by property, a real detailed schedule. I guess, how do we- we're almost a year, I can't believe it, from that Investor Day.
Yeah.
Obviously, things have opened up, but, you know, not going property by property-
Mm-hmm
... but in terms of expectations, you know, are things clearly better than it was last November when you, when you presented, in terms of your thoughts, like, perhaps... I remember at the time, there was still some concern about maybe, you know, what Macerich would have to come up with some money-
Mm-hmm
... or things like that to, you know, to put back into the properties. What other color could you share with us?
Sure. So we had an Investor Day in late November. At that point in time, we were, you know, engaged in about $1 billion of financing transactions on Green Acres here in Long Island, as well as Scottsdale Fashion Square. And those two assets were actually net accretive. We pulled cash out, and we financed those on balance at around 6%. And then in March, obviously, we had a regional banking crisis, and that really is what seized up the market. Certainly couldn't have predicted that. So the second quarter, there was really no ability to finance anything. So here we are now in the third quarter, the markets are back open and operating. My view in terms of that detail that we provided in Investor Day is very much on track.
We're, you know, in the market on a couple assets. And again, as I look at 2024, I have no concerns about financing the quality of assets that are there. I think on balance, we'll be pulling a little liquidity off the table, not putting money in. I think we'll overborrow a little bit. I expect that to be the case on Tysons Corner, for instance, where we will overborrow 10%-15% over what's there today. And I would say, you know, the underwritten rate is probably somewhere between 6%-7%. Depends on the leverage, depends on the quality. So hopefully that gives you a good sense. But thank you for not pulling up that detailed schedule and asking me.
Yeah, it was, it was good.
Can we turn to the transactions market? So we've seen a few more, you know, higher quality mall trades year to date. And then, you know, you guys recently took back some boxes from your JV partner, Seritage. So just want to check in with where you see the greatest opportunities are for external growth.
Yeah. So for us, you know, I think it's reinvestment back into our portfolio. We've got some great properties. We've got the ability to, again, just deliver something that is unique and different. We've been doing it over the last few years, but I think the opportunity over the next, say, 10 years to continue to focus on bringing mixed use is significant. In fact, I would see us over the course of the next decade, adding several thousand apartment units, for instance, across our, our portfolio. So that's really the best use of our resources, and the purchase of those 5 former Sears locations was lockstep with that. We've got...
Out of that set of five, we've got three assets that are fully leased, and either the uses are open or the uses are being developed or the uses are in final strokes of lease documentation. So that's Freehold Raceway, that's Chandler Fashion Center, and that's Danbury Fair. Those assets are or those boxes are 100, 100% spoken for. The two remaining are Washington Square and Los Cerritos. And in both cases, I, we, you know, our redevelopment plan will be to repurpose that location and add mixed use. It will be to add residential, perhaps hotels. It will be to add food and beverage pavilions with just an exciting place-making experience, both at Cerritos and Washington Square. And these are, these are assets that are in our top 10.
You know, that purchase was very consistent with our redevelopment vision.
What would you guys say is the most underappreciated thing that investors are not considering, around store and location?
Yeah, I think that's a great question. And I think I think what people are under... You know, we're not the only ones that are talking about this, right? We're all talking about, especially the better quality real estate, the ability to diversify. I think what people don't appreciate is the durability that that creates. I think what people don't appreciate is the value, and you mentioned this as well, the value of our land. It is extremely significant. So as you think about the opportunity to add residential, when we contribute land... And by the way, those residential developments will be with subject matter expert, you know, that we align ourselves with in a JV.
We'll put our land into the JV, and as a result, including, you know, leveraging the project with Fannie Mae or Freddie Mac financing, our incremental return on vertical equity, which is going to be a small amount of capital, is going to be significant. It could range from 15%-20% because of the opportunity to finance those projects, but also because of the value of the land. So as we start to source those residential opportunities, we've got a really coveted set of experiences that are already there, that are already built in, and that can garner premium rents. And so I think oftentimes what's underestimated is the ability to create something new and more powerful than just traditional mall uses. But I think people are starting to understand that that's, you know, that's here, that's now, that's really a reality.
Would you say that 8 times leverage target is kind of conservative? It's, you know, versus what you could do if you wanted to. I know a lot of investors knock it, having high debt, especially in this environment. With rates are on the longer term, it's going to be a risk to any story. You know, with 8 x, you kind of conservative target in your, in your mind? Would you go below that, or is that kind of-
Well, I wouldn't say that's a target, that's a forecast. You know, our target is to get our leverage down to about 7x-7.5x . That's, that's in the fullness of time where we've operated. But we're not gonna get there next year, absent, you know, a major transaction, which I don't envision. That's not in our planning right now. But I do think that's achievable over the next two-three years, by virtue of all the things we've been talking about: leasing, demand, growth, and occupancy, et cetera.
I know we're out of time, but you won't sell the land fully, you know, to get the cash-
Yep
... for that land, to strengthen the balance sheet?
No, I don't think that's... First of all, you know, you need to be in a position of controlling the real estate, and once you sell that real estate, you lose control, right? So, ideally, you contribute that land into a JV where you do have control over the product that's developed, but you also have a situation where that land, and given the inherent value of that land, you really don't have a lot of expenditure to bring that residential project to the campus. So that's really the most efficient vehicle. There may be some instances where we ground lease to certain uses, like hotel.
But really, the value of our land and also the flexibility in terms of timing of what we bring to market and when we bring to market, this is land that we've owned forever, right? We don't really have a basis that is significant, carry to us. We can choose the timing of when we want to actually develop without having that carry cost burdening us and putting pressure on us. So it's really an ideal model, and we envision being able to replicate that across our portfolio.
Okay, thanks. I know we're out of time, but three quick, rapid-fire questions, rapid answers.
Yeah. First question's on the Fed. Do you believe the Fed is done hiking, yes or no? And do you expect the Fed to cut rates in 2024, yes or no?
No, they're not done, and yes, I do expect them to cut.
All right. Second, do you believe real estate transactions will meaningfully pick up by the fourth quarter of 2023, the first half of 2024, or the second half of 2024?
Second half of 2024.
Last, are you using AI today to help you run your business, yes or no? And do you plan to ramp up spending on AI over the next year, yes or no?
No, we're not using AI meaningfully in any way, and we will pay attention to it.
Thanks.
Thank you very much.
Great. Thank you. Thanks again.