Nov 1, 2013
Executives
Kristina Lennox Donald C. Wood - Chief Executive Officer, President, Trustee and Chairman of Executive Investment Committee James M.
Taylor - Chief Financial Officer, Executive Vice President, and Treasurer Jeffrey S. Berkes - President of West Coast Chris Weilminster - Senior Vice President of Leasing Dawn M.
Becker - Chief Operating Officer, Executive Vice President, General Counsel, Secretary and Member of Executive Investment Committee Melissa Solis - Chief Accounting Officer and Vice President
Analysts
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division Michael W.
Mueller - JP Morgan Chase & Co, Research Division Michael Bilerman - Citigroup Inc, Research Division Craig R. Schmidt - BofA Merrill Lynch, Research Division Jason White - Green Street Advisors, Inc., Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Omotayo T.
Okusanya - Jefferies LLC, Research Division Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division Samit Parikh - ISI Group Inc., Research Division Vincent Chao - Deutsche Bank AG, Research Division Christopher R. Lucas - Capital One Securities, Inc., Research Division
Operator
Welcome to the Third Quarter 2013 Federal Realty Earnings Conference Call. My name is Dawn and I will be the operator for today's call.
[Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Kristina Lennox.
Kristina, you may begin.
Kristina Lennox
Thank you, Dawn. Good morning, everyone.
I'd like to thank you for joining us today for Federal Realty's third quarter 2013 earnings conference call. Joining on the call are Don Wood, Dawn Becker, Jim Taylor, Jeff Berkes, Chris Weilminster and Melissa Solis.
These and other members of our management team are available to take your questions at the conclusion of our prepared remarks. Our third quarter 2013 supplemental disclosure package provides a significant amount of valuable information with respect to the trust's operating and financial performance.
This document is currently available on our website. Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information contained in our forward-looking statements, and we can give no assurance that these expectations will be attained.
Risks inherent in these assumptions include, but are not limited to, future economic conditions, including interest rates, real estate conditions and the risks and costs of construction. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operation.
And with that, I'd like to turn the call over to Don Wood to begin our discussion of our third quarter 2013 earnings results. Don?
Donald C. Wood
Thanks, Kristina, and good morning, everybody. Let me start out this morning by thanking those of you on that call who either came to or listened to the webcast of our Investor Day presentation at Assembly Row in Massachusetts a few weeks back.
We had a ball up there and really appreciated the opportunity to share our excitement about Assembly Row, as well as our vision for the future of the entire company, with many of our most interested owners and analysts. If you were unable to get up to Boston, you can still access the webcast through our website at federalrealty.com.
We used the time we have with you that day not only to lay out the most recent status and plans for our Assembly Row development, but also to discuss our long-term business plan. What it is that we expect from the high-quality core portfolio, the impact of smaller redevelopments, the occasional acquisition and, of course, the larger mixed-use developments in Somerville, Rockville, San Jose.
We remain convinced that the right combination of those business plan components gives us more visibility, more transparency and more likelihood of achieving sustained and superior growth in both earnings and asset value over the next decade than anybody in the business. Third quarter 2013 results helped validate that premise.
So let me go through those numbers. First though, you might remember that last year's quarter benefited from that $6 million termination fee from Safeway.
That was $0.09 a share, related to the Genuardi lease in New Jersey, and it was also hit by $2 million or $0.03 a share going the other way, for the CFO transition costs, when Jim Taylor joined the company. There were no such unusual items this quarter.
So when I talk about comparisons between this year and last, that excluded the impact of those 2 items last year. So same-center property income grew 5.7% when excluding redevelopment, 4.9% when including it.
The impact of including redevelopment this particular quarter is negative, as we vacated smaller[ph] space in preparation for redevelopment. Those are very strong numbers, earned without the benefit of large occupancy gains.
Those numbers reflect, once again, tenant health, as an industry that is as good as it's ever been, with years of 0 bad debt expense. FFO per share of $1.16 compared with $1.06 last year, or 9.4% growth.
And we didn't lever up to get any of that growth. In fact, even with the ambitious development program in full swing, net debt, as a percentage of total booked capitalization, went down.
We ended the quarter with a portfolio that is 95.3% leased, the same as at the end of the second quarter and up slightly from the 95.1% a year ago. Again, our income growth story is not primarily one of filling long-standing vacancies, but rather negotiating new leases at significantly more rent than the prior lease.
In that regard, we completed 89 leases during the quarter, for which there was a previous tenant, for 274,000 feet of space, at an average rent of $39.12, 20% more than the tenants they replaced or renewed. Leases from new replacement tenants, which made up about a 1/3 of the total deals, were raised at 39% more rent, while renewals representing about 2/3 of total deals were up 9%.
And one more thing, of all the deals done this quarter, 2/3 had contractual annual rent bumps of 3% or more. The overall retail leasing and business environment is pretty strong in the coastal markets we're operating in, with nearly all types of retailers and restaurants looking for A locations and willing to pay up for them.
Case in point in the quarter was Best Buy's option exercise at Santana Row. You may remember from my second quarter conference call remarks that we have signed a deal with Fixture Living for that space, thinking that it was highly unlikely that Best Buy would exercise their last 5-year option at the very strong rent required to do so, but they did.
And they did because the company was unwilling to lose a very important Silicon Valley location. As a result, our 2014 FFO would be $0.04 per share higher than we were forecasting on that deal alone.
And they're not an anomaly. Right now, the landlord's position is particularly strong in locations like this one.
This core portfolio and the consistent sustainable and transparent growth that it provides to this company is the foundation of this business plan. It's the reason we can take the approach we have taken, just supplementing it with selective acquisitions, with growth prospects that are equal or better than the core, as well as development or redevelopment initiatives that not only provide incremental cash flow to the company, but also grow faster and establish a long runway for value enhancement for the foreseeable future, in amounts that are large enough to really move the needle in a company of our relatively small size.
So let's talk about where we are in these fronts at this point. First, both our investment committee, and then our board, approved a new 115,000 square foot lifestyle-based retail center, adjacent and complementary to our Plaza El Segundo Shopping Center in Southern California.
The $80 million project, which we marketed as the Pointe, is now fully entitled and will be under construction shortly, with a 2015 opening schedule and a near 8% initial return. The Pointe will greatly benefit 2016 results.
Plaza El Segundo itself has outperformed our underwriting in the first 2 years of ownership. And I think our ability to get such a meaningful supplementary project underway in such a short amount of time really speaks well to both the initial acquisition strategy surrounding Plaza El Segundo and the adjacent land, as well as the West Coast team's ability to find and execute additional value-creative opportunities.
Retail and restaurant demand for The Pointe has been exceptionally strong and has given us added impetus to move forward at this time. Stay tuned for more as we get underway.
Staying on the West Coast for now, but moving north to San Jose, I'm pleased to report that a $75 million investment in Misora, the 212-unit residential project at Santana Row, remains on time and on budget with strong pre-leasing demand, making us very optimistic about its success. The first move-ins are expected by year end in the first section of the project, with construction on the later section finishing up midyear, and the building largely leased up by the end of 2014.
Misora will generate an 8% yield in a market where new A-quality residential trades in the low 4s or even below. That's $75 million of immediate value creation.
Heading back east, the first phase of Pike & Rose in Rockville, Maryland is also progressing on time and on budget. At present, 85% of the total retail rent pro forma[ph] and 90% of the retail space has been committed under either a fully-executed lease or a heavily-negotiated letter of intent.
In addition to the iPic Theater, the only one of its kind in Metro D.C., merchandising will include respected club operator, Sport and Health, restaurants like Del Frisco's Grille, Stella Rosa, M Street Kitchen, retailers like Gap, Gap Kids, City Sports and The Pink Palm. Now, the economics of this first phase at Pike & Rose are going to rest with the success of the residential building and not the retail, and so we won't have a real handle on that until we start marketing the apartments next spring.
But the fact that the personality of this destination, which is formed by the ground floor retail experience, has started out so positively, is extremely encouraging. It bodes very well for future capital allocation decisions here, with respect to future phases.
And in that regard, we're feverishly working on putting together a phase two plan for a continuation of the street that we are building in phase one. Capital estimates are still rough, but would probably be in the $200 million range.
We would hope to be able to announce a thoroughly vetted plan at some point in the first half of 2014 At Assembly Row in Somerville, I surely hope that the Investor Day and our webcast got you a whole lot more comfortable with our vision and execution of this one-of-a-kind initiative. We continue to convert retailer interest into LOIs, and LOIs into signed leases.
We currently have 77% of the retail rent pro forma[ph] and 83% of the retail space committed under either a fully-executed lease or a heavily-negotiated LOI. We're moving toward our initial opening of 3 of the first 4 buildings in the early summer of 2014, with the fourth building, the office over retail building started later, scheduled to open just a few months after that.
As with Pike & Rose, Assembly remains on time and on budget. And one more piece of Assembly news, we purchased the 12 acres immediately adjacent to our Assembly Row site, known by most of you as the IKEA parcel, for $18 million last month.
We closed on that parcel without a completely wrapped up plan for the site, but with a number of development alternatives that would be additive to value, both on a stand-alone basis and also for the rest of Assembly Row and Assembly Row marketplace projects. In what is our preferred alternatives, we continue to make progress on work with a potential office tenant on the finalization of a lease and a development structure.
We're not there yet, but progress has been steady and we remain committed to seeing it through. These in-progress developments, along with what will more than likely be future phases, and that leverage the initial phases, not unlike Santana Row, not unlike the Bethesda Row, not unlike Plaza El Segundo, along with our regular stream of redevelopment opportunities, are really quite extraordinary.
They're really happening. And when added to what we believe to be the best shopping center portfolio in the business, gives investors a transparent window and likelihood of real value-enhancing growth that is just second to no one.
It's not years and years away, it's happening now. That's it for my prepared comments this morning.
Let me now turn it over to Jim to talk about our financial results and outlook in more detail.
James M. Taylor
Thanks, Don, and good post-Halloween morning, everyone. As Don mentioned, I'm going to cover our results in a bit more detail, review the balance sheet and provide details on our guidance for the remainder of 2013, as well as 2014.
Turning to the quarter, we reported $111.6 million of property operating income, an increase of $7.2 million or 6.9% over the prior year quarter, excluding a $6 million Genuardi's term fee. Our same-center growth of 5.7%, or 4.9% including redevelopment, drove most of this increase, which was achieved, importantly, despite relatively stable occupancy around 95%.
Again, as we discussed at our Investor Day at Assembly Row, our portfolio continues to drive growth from rollover and contractual rent increases, not just occupancy. Year-to-date, our average rollover on a cash basis has been 18%.
That level rivals the growth that this portfolio generated during the pre-recession peak in the mid-2000s. Importantly, this well-located real estate outperforms not only during the downturn, but with hard work from the leasing team and our operations team, it continues to surprise even us, as we achieve higher and higher rents per foot, with leases this quarter, in fact, signed at $39.12 per square foot.
As you consider the growth that remains embedded in this portfolio, consider that the average rent signed over the almost 4-year period since 2010, in other words, post-recovery, of $30.60, significantly exceeds the in-place average rent today of $24.39. Compare that performance, as we did at our Investor Day, to any other shopping center portfolio and you'll see that it is without peer.
Another comment I'd like to make on same-store NOI is that it includes 97% of our portfolio, 97%. In other words, it's truly predictive of what's happening in the portfolio and the company, overall.
Green Street recently wrote in its [indiscernible] piece, if you exclude 10% or 15% or 25%, the comparability of a same-store NOI metric truly is neutered. Additionally, as we've said in the past, our rollover growth statistics represent 100% of our leasing activity on comparable space.
That's important to consider. Another contributor to our overall POI growth were our acquisitions, of course, of East Bay Bridge and Darien.
And we can report that we are pleased with the overall performance of both assets relative to our initial underwriting. Looking at marketing expenses, they increased during the quarter by about $300,000 as we ramp up for the openings of Assembly and Pike & Rose, and we also had about $300,000 less in POI from the sales, Forest Hills.
G&A expense declined year-over-year associated, as Don mentioned, mostly with the CFO transition, offset by other personnel costs. We expect G&A for the year to be approximately $30 million, before considering the impact of any acquisitions that we may complete.
Interest expense declined by $2.5 million in the quarter due to reduced rates, as we continue to benefit from our attractive refinancing earlier in the year, offset by a slightly higher balance, as we've carried excess proceeds of cash during the quarter. Even with this incremental drag of cash and marketing, we generated a record quarter in terms of FFO at $1.16 per share, an increase of 9.4% over the prior year, when you exclude the Genuardi's term fee and the impact of the CFO transition.
Now, turning to the balance sheet. We ended the quarter with $128 million of cash and nothing drawn under our $600 million line of credit.
Overall, our leverage remains low at 24% net debt-to-market cap, 5.2x net debt-to-EBITDA and 3.4x fixed-charge coverage. Importantly, as some of you have noted, we have no floating-rate debt and our maturities over the next 2 years, from a coupon standpoint, average close to 7%, which presents an opportunity, even in this volatile interest rate environment, for continued accretion.
Again, this balance sheet strength and flexibility is important, as we will deliver approximately $315 million of mixed-use value creation at Santana, Assembly and Pike & Rose over the next 4 quarters. During the quarter, we also realized $34 million in asset sale proceeds at an average cap rate below 5%, and raised approximately $35 million of sales -- in sales of our shares under our ATM program.
Turning to our outlook for the balance of 2013. We have increased our guidance range to $4.60 to $4.61 to reflect the continued operating strength of the core portfolio.
We expect our full year same-store growth to be in the 4.5% range, and also expect some offset from increased marketing and other expenses as we ramp up our efforts at Assembly and Pike & Rose. In addition, we will continue to have a bit of drag, as we talked about in prior quarters, as mid-Pike comes offline, and we'll also have some drag in the quarter as Building 8B grand opens in November.
We are quite pleased with our leasing progress at 8B, with the initial leasing of 48 of 78 available units in that building, and rents per foot that meet or exceed our pro forma rent originally underwritten. Let me pause for a moment here, and again, emphasize the point Don made, that in that asset alone exists $75 million or so of value creation, given that we're delivering it at an 8 and a market cap rate environment in the 4s.
For those of you attending NAREIT in 2 weeks, I invite you to swing by Santana and check out just how well Jeff Berkes and the West Coast team has executed this apartment project. It surely would be the envy of any of our multifamily peers.
Finally, on 2013 guidance, I should note that it does not include the impact of any potential costs associated with acquisitions that may be completed in the balance or any prepayment premiums associated with early refinance of any upcoming maturities, should the debt markets prove opportunistic. Again, the weighted average interest rate for our 2014 maturities is 6.7%, which in and of itself, is an opportunity.
Now, looking forward to 2014, we are delivering a lot of value creation. In addition to the $75 million of Misora apartments at Santana Row, which we'll be destabilizing during 2014, we will grand open the retail space in Buildings 11 and 12 at Pike & Rose in the third quarter, with office coming on in 2015, for a total delivery of $150 million.
And we expect to grand open Assembly Row in the summer of 2014 with an approximate cost of $150 million, with the office in Building 2 delivering in 2015. That's $375 million of deliveries over the next 4 quarters.
And important for everyone to consider, the significant amount of POI that will be delivered by these assets as they stabilize. In addition, our pipeline continues to grow, as we emphasized at our Investor Day at Assembly.
We've added an additional $94 million of new redevelopments this quarter, including The Pointe, at a weighted-average expected return of 9%. Again, all of this value creation activity will be supported by the continued strength in our core portfolio, which we expect will produce same-store growth, including redevelopment, in the 4% to 4.5% range for 2014.
We expect occupancy, again, to remain relatively stable during the year, with some rollovers, and expect continued strength in tenant performance. Let me talk a little bit about our FFO guidance.
As disclosed in our supplement, we expect FFO in 2014 to be in the range of $4.84 to $4.92, or an increase of over 6% at the midpoint. As discussed with some of you, what's particularly impressive is that this range reflects almost $0.15 of onetime drag associated with the delivery of all that development, including $0.04 to $0.05 per share of upfront marketing costs, as we grand open Assembly and Pike & Rose and build upon existing shopping practices and consumer awareness; 5% to 6% (sic) [$0.05 to $0.06] per share of drag related to the multi-family lease up of Misora at Santana and Building 12 at Pike & Rose.
Again, this reflects that we'll be incurring full interest and operating costs as we open these apartments and move towards stabilized NOI. But make no doubt, that value creation is there upon opening.
$0.01 to $0.02 will be incurred next year as we finish demolition of Mid-Pike Plaza. We also will not have $0.01 to $0.02 of percentage rent that we fully expect to realize at Assembly Row after a year of operation.
And finally, we'll be losing almost $2 million of POI as we take the rest of Mid-Pike Plaza out of service in the first quarter of '14. As you think about that drag, let me pause to make a very important point.
If we were not investing in this value creation, that upon stabilization will contribute $35 million to $40 million of POI, our year-over-year FFO growth would approach 10%. Looking forward, we, again, expect G&A to remain consistent with 2013 in the $30 million range, importantly, as we've already made the investments in our platform over the last few years to effectively execute the delivery of all this value creation.
From a sources and uses standpoint, we expect to invest approximately $250 million to $300 million in development and redevelopment capital in 2014, and have approximately $300 million in debt maturities, again, at a weighted average rate of 6.7%. As has been the case this year, we expect to match fund these activities with a mix of cash-on-hand, cash from operations, senior note issuances and moderate issuance of equity under our ATM.
As always, we will focus on maintaining maximum flexibility, even at the cost of near-term accretion, ensuring our credit metrics remain strong and our flexibility preserved. Finally, as always, our guidance for 2014 does not include the impact any acquisitions or prepayment of premium associated with opportunistic early refinancing.
In closing, allow me to comment that our current plan provides us unparalleled visibility on growth, not just for next year, but for the next several years, as we overcome the drag associated with the early ramp and the deliveries of our development. Again, as we outlined in our Assembly Row event, our current pipeline will deliver between $35 million to $40 million of NOI as it stabilizes, almost 8% of our existing total POI.
And there's much more opportunity to come from these assets that we own and control today, and as we demonstrated at the Assembly. In an environment, where most shopping center portfolios are now hitting peak occupancy, the performance of our core, the growth that is embedded in existing rents, the continued strong rollover and the value creation from our development and redevelopment pipeline is truly without peer.
All pistons are firing on our strategic plans and more than double the NOI of this company with very little external growth over the next 10 years, supported by one of the strongest balance sheets in this sector. With that, operator, we'd like to turn the call over for questions.
Operator
[Operator Instructions] Our first question comes from Jeff Donnelly from Wells Fargo.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
On 2014 guidance -- Jim, I just apologize, I missed this in your remarks. But concerning that guidance, did you provide the core NOI growth that underlies it?
I might have missed that.
James M. Taylor
I did. We expect that to be in the 4% to 4.5% range.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
Okay, great. Just moving around, I guess, on the East Coast, the IKEA land development, I know you didn't have much to add there.
There's certainly been a lot of speculation around the path you might take. I'm curious, just to build on your remarks that you made at the Analyst Day about some work you guys might be doing in the office front, what's your preference there, I guess, in terms of an outcome?
I mean, do you guys look at that and think you'd rather sell or ground lease that land to someone who would construct their own building? Or would you opt to be a developer?
I'm just trying to understand how you guys are weighing the return prospects on that site versus the capital commitment that you have to that zip code?
Donald C. Wood
Yes, that's fair, Jeff. The IKEA land and what happens on that IKEA land, as you know, we're looking at a couple of things, and one is a sizable office deal.
And as we work through the structure, I guess, if we had our way, that would be more somebody else's capital, primarily. The ability to establish that piece of land and, effectively, the whole assembly area, as an office location, would be huge to the future value creation of the rest of Assembly.
I don't really think we need to be putting a lot of our capital to work to accomplish that. So that's our preference and I'll give the same caveat that I wrote[ph] gives us, to the extent the deal makes an awful lot of sense to put our capital out, we'll certainly do that.
But my preference would be to structure it with somebody else's capital.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
It's helpful. And I guess sticking with the development stuff on The Pointe.
Can you give us some color on the expansion there? How's leasing progressing?
And what sort of initial rents, I guess, you're expecting for the retail and the office that's baked into that 8% ROI?
Donald C. Wood
Yes. I love to talk about The Pointe.
I think Jeff is on the call from California. If you are, Jeff, can you handle that?
That will be great.
Jeffrey S. Berkes
Yes, sure. Let me dial you back a little bit on The Pointe and then I'll get to your question.
But as you might remember, when we bought Plaza El Segundo, we purchased what is the bulk of The Pointe site, an 8-acre piece of land right at the hard corner of Rosecrans and Sepulveda. And that 8-acre site came with 70,000 square feet of entitlements.
We also acquired, when we acquired PES, the rights to exercise options on a couple of pieces of adjacent land. We've exercised one of those options.
We're in the process of exercising another. And we also acquired a fourth piece of land that we didn't have tied up 2 years ago, when we bought PES.
So what we've done, obviously, since we bought PES, is gone ahead and assemble that piece of land and taking it through the entitlement process and expanded the entitlement from 70,000 feet to 115,000 square feet. And as Don said in his prepared remarks, we are now fully entitled and we're in the process of wrapping up our pricing and GMP construction contract negotiation and hope to have that done soon and be underway, in earnest, here shortly.
So what we're delivering to the market, if you will, is 115,000 square feet, 25,000 square feet of second-floor office space and 90,000 square feet of ground-floor space, that's composed or comprised of 65,000 square feet of retail space and 25,000 square feet of restaurant space. We've -- a couple of things that we kind of know and understand about that location that have proven out since we first got into the deal a couple of years ago, are, one, there is no great gathering place to shop and eat right now in the South Bay.
I mean, obviously, the beach is great, but parking at the beach and shopping and dining at beach are kind of difficult, right? So there's definitely a void in the market for a great place.
And when you step back and look at the retail distribution in L.A. and Orange County, there's a lot of lifestyle retail and other strong retail in Beverly Hills, in Santa Monica, but as you get to South, there's not another node, until you go all the way down to Costa Mesa, Fashion Island, that kind of thing, right?
So there's definitely a hole in the market and a void. And we know that because we live out here.
And we know that because we talk to the retailers and restaurants that are dying for better space in this market. And we see how successful those tenants can be in the collection portion of our Plaza El Segundo property, where we've got 50,000 square feet of lifestyle, where tenants do really, really well.
So the product we're delivering is designed to fill both of those voids. We're going to have a great plaza between the 4 buildings we're building, where people can hang out and have a cup of coffee, glass of wine, sit outside and dine, all that kind of stuff, and we're delivering a ton of parking.
One of the offices is use will have a 7:1,000 parking ratio at the property. And there's been consistent and strong demand from both the retailers and restaurants since we've got into this a couple of years ago.
We've got leases signed right now and several deep in the negotiations -- several leases deep in negotiations that we hope to have signed shortly. The rents are impressive.
I really don't want quote rents on this call, we can talk about that one-on-one, if you want. But they're very strong.
And that's because there's a hole in the market.
Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division
And then just last question, actually. Just on TIs, the last few quarters, your new lease and renewal lease TIs, particularly new leases, have been running in the, call it, 40s on average.
Is that sort of a run rate we should be thinking about going forward? Or this has more to do with some special projects that are flowing in there?
Donald C. Wood
It's a couple of things. There's absolutely a trend, by the way, in our business of -- especially the national tenants trying to take advantage of our lower cost of capital and looking for money from landlords.
That's not just Federal, that's anybody. And I will tell you, certainly to the extent it's -- not the comparable stuff, to the extent it's the new stuff, that's all included, obviously, in our development yields, where the number to be[ph] .
In terms of the normal day-to-day stuff, you are seeing -- I mean, when I look at it, I mean, we're at $20 a foot, or so, this quarter on TIs. And that's probably pretty representative of what it's going to be, going forward, yes.
Operator
Our next question comes from Michael Mueller from JPMorgan.
Michael W. Mueller - JP Morgan Chase & Co, Research Division
Couple of quick things. First of all, if we're looking at the leasing spreads, the new spreads as well as the renewal, over the past couple of quarters, they've widened out, accelerated.
And I was just wondering, as you look to 2014, what's the visibility on those higher levels being sticky?
Donald C. Wood
I think they will be. But I got to tell you, this is still a small company.
It's still a 20-million-square-foot portfolio that's going to turn 1.2 million, 1.3 million, 1.4 million feet per year, and so a few deals impact that. It just makes it -- it makes it more lumpy.
I can absolutely tell you, Mike, that as we sit back and we look, and I think we did a pretty good job at this up at Assembly, we kind of showed you that the in-place rents of this company are $24 or $25, something like that, overall, and then that the deals we've been doing have been in the 30s relatively consistently, I think, very consistently. So the -- there's no question that the -- that's a 30% increase in mark-to-market, if you use that as a surrogate for mark-to-market.
And we expect that to be sticky as it continues. But that does not mean that every 3 months, when we report results, that there won't be a deal or 2 or 3 that bring down that trend, but that's the overall trend that we're very comfortable with.
Michael W. Mueller - JP Morgan Chase & Co, Research Division
Got it. And then, Jim, when you're talking about guidance, not for 2014, but for the balance of this year, it seems like you went out your way to talk about how no acquisition costs are in there.
Are you expecting anything to close? Or is there a good shot anything can close before year end?
James M. Taylor
There is, and we're hoping Christmas comes early this year.
Operator
We have Michael Bilerman from Citi online with a question.
Michael Bilerman - Citigroup Inc, Research Division
Jim, sticking with you just on balance sheet, and as it relates to guidance, you did talk about $300 million, almost 7% debt rolling next year. I think the bonds mature in August, and I guess the secured debt, throughout the year.
You also talked about potentially hitting the markets early. Obviously, depending on when you refi that debt would have a material impact to next year's numbers.
So I'm just curious what have you embedded for accretion for refinancing in your 2014 estimate?
James M. Taylor
Yes, it's a great question. And we've looked at a couple of scenarios.
And as part of what goes into the range, Mike, in terms of that timing, and the benefit could be anywhere from $0.04 to over $0.05, depending on when we execute and the quality of that execution. So we're obviously looking at the markets closely and really trying to ensure that when we do go in, we're being as opportunistic as possible.
But when you think about that $0.10 range, obviously, there are different scenarios at the low end of the range versus the high end of the range. Does that help?
Michael Bilerman - Citigroup Inc, Research Division
Right. Right, but I assumed the earlier you execute the bonds, the lower the FFO for next year is going to be?
James M. Taylor
The lower the interest expense will be. Correct.
Donald C. Wood
Just to be clear, I mean, we absolutely intend, to the extent the markets are favorable to us, to take 2014's debt out this year. We absolutely intend to do that, whether we're able to get there or not.
If that's the case, 2014 would benefit from the lower interest expense for the entire year, though we have the prepayment costs this year. That's what...
Michael Bilerman - Citigroup Inc, Research Division
So you would actually take the bonds out and pay a prepayment penalty and it's effectively that way?
Donald C. Wood
If rates are where they are today or they actually get a little bit better, then the answer is yes.
Michael Bilerman - Citigroup Inc, Research Division
And then you talked about the $0.15 drag. I'm just curious on the $0.10, with all the marketing expenses that you talked about between Assembly and the market -- the marketing expenses and ramping up in Santana, you're talking about a $0.10 drag for the year.
When does that hit its peak during the year, and how much of that spills over 2015? And I'm just trying to put together effectively a 2-year sort of ramp as we start to think about what FFO could be in '15 and sort of the quarterly impacts during the year.
Because I assume this is not stuff that's all going to be even during the year in terms almost $7 million of drag.
Donald C. Wood
That's very, very, very astute, Mike. And the way you can look at it basically is growing from the first quarter through the second quarter.
The second quarter will be high. The third quarter will be high.
And then the fourth quarter coming off a little bit. Yes, there will be some of those costs that continued into 2015.
But if you ran a bell curve and you peaked at somewhere in the May, June, July, August, September timetable, you'd be in good shape, I think.
James M. Taylor
And Mike, just to clarify that, and thanks for drilling in on it, that $0.04 to $0.05 of marketing relates really to initial-phase marketing as we open up these 2 large mixed-use projects that we don't expect to incur on an ongoing basis. As Don said, a lot of that will be coming in the second and third quarter.
And then the other element of that $0.10 that you referred to is really just the lease-up drag, if you will, at the multi-family units we're delivering, where we're going to be incurring full operating costs and no longer capitalizing interest as we lease those apartment units up.
Michael Bilerman - Citigroup Inc, Research Division
Right. So as we think to 2015, the growth likely is significantly in excess of the 6% in '14, all else being equal?
James M. Taylor
That's right. But we've also got other potential development opportunities that we may be delivering, or beginning and delivering to 2015.
So a little bit hard to provide a lot visibility on the absolute level of growth '14 to '15. But you're on the important point, which is the value creation that's underway today, that NOI will be coming on to the company in 2014 and '15.
Operator
Our next question comes from Craig Schmidt from Bank of America Merrill Lynch.
Craig R. Schmidt - BofA Merrill Lynch, Research Division
I was wondering, when you look at your portfolio in either, on one side, street retail versus maybe suburban shopping centers, what has been giving you the strongest internal same-store growth?
Donald C. Wood
Craig, it's a very fair question. Let me just take this question and make it look fuller for a second.
A lot of people would say, "Oh gosh, if you believe so much is the street retail and the mix of your stuff, why wouldn't that be everything that you did?" Because in -- absolutely, our strongest growth does come from properties like Bethesda, but it also comes from the Congressional Plazas and the Barracks Row, larger necessity-based centers, too.
The reality is, Craig, the necessity-based stuff that we have, because of locations, it's very, very good. And it's really, really important.
I mean, we talked about that growing at 3% to 3.5%. That's pretty darn strong in terms of growth.
We want that here. The ability to supplement it with these projects that we're talking about, and including street retail, the street retail in the portfolio, that has kind of a longer-term, better growth prospects to it, is kind of like icing on the cake.
So I would say that with respect to the street retail stuff that we've had for a long time, we've got some pretty darn good growth inherent in there. The idea of going out and buying street retail at 4% and having some of those leases be very, very flat is a whole -- is not particularly appealing.
So like everything else, whether it's necessity-based or street retail, the devil is in the details in terms of the lease terms. We've got the -- we've got some strong growth in our existing street retail, larger, generally, than necessity-based stuff.
But necessity-based stuff is pretty good, too.
Craig R. Schmidt - BofA Merrill Lynch, Research Division
And I was just wondering if the suburban stuff might have the greater optionality or the greater opportunity for redevelopment, and maybe a little more difficult to do with street retail, or is that not the case?
Donald C. Wood
I don't know. It really gets down to the -- I hate to make a general comment like that, because it really does depend on the particular piece of land.
I will say this, larger shopping centers have much more flexibility. I certainly would prefer, whether it's a suburban shopping center in Wynnewood, Pennsylvania or a street retail project, to the extent it's a bigger piece of land, there's more stuff that winds up happening to it.
And the thing that hurts that the most are the big national tenants that have lots of rights to their leases to restrict development. That's the -- that's probably the single biggest thing that creates those kinds of issues.
They require money to get the -- to get what they -- to get done what you want done, and that makes the deals harder to make, economically.
Operator
Our next question comes from Jason White from Green Street.
Jason White - Green Street Advisors, Inc., Research Division
I just wanted to follow up on your re-leasing spread question from earlier. If you look at the trend, it's obviously been very positive, and wondering what part of that is just kind of organic rent growth versus leases that may have been signed at the trough that were depressed rents that are just starting to roll now, and what you kind of expect going forward?
Donald C. Wood
Hey, Chris, what do you think about that?
Chris Weilminster
Yes, I would just say that I believe a lot of that is organic growth. We've not really seen a lot of our leases from the trough rolling over at this point.
So I -- my general comment to that would be is that we're seeing a lot of organic growth and we push really hard on our core portfolio. The answer that Don just gave, when I think about our core portfolio, that was for some assets in Huntington, New York, some stuff in Gaithersburg, Maryland, where we're going to be able to push some really exciting things, as well, that will come through in our numbers in our core portfolio.
We focused very hard on our organic growth, and I think it will be a couple of years before we see the trough stuff come to the forefront that we can take advantage of.
Jason White - Green Street Advisors, Inc., Research Division
Okay. So do you think that your spreads woulds -- might be increasing by the time you get to those trough rents rolling?
Chris Weilminster
I'd rather have Don...
Donald C. Wood
I hope so. I hope so, Jason.
I hope so, Jason. But that's, again, going to come down to the same answer I gave before with respect to the mark-to-market on the entire portfolio and the general trend, which is very positive, but any particular quarter could surprise you negatively.
Jason White - Green Street Advisors, Inc., Research Division
Okay then, one more question on your -- you have a breakout page of future opportunities for expansion and development. I was wondering if there's any opportunity that stand out that maybe a little more near term,, that have a lot of opportunity for you guys that we really haven't gotten a lot of detail on in the past?
Donald C. Wood
Are you're looking for extra value that you can find for the model, Jason? Is that what you're saying?
James M. Taylor
I mean, Jason, the first thing -- I'll ask Don to comment on a couple of things, but the first thing I'll highlight is, in this quarter, we added an additional $94 million of redevelopment, including The Pointe, at about 9% return. And I think, generally, what we're pleased with is that our strategic plan for each and every asset focuses on how, over time, we can continue to maximize value, whether it's moving an anchor pad site or adding multi-family, like we did at Chelsea.
So we don't put things on this page that we don't think are going to be actionable, difficult to comment on the timing of any of the ones in particular. Dawn, I don't know if you want to add anything to that?
Dawn M. Becker
There are a couple, Jason, that given where we are in the process of talking to tenants and in the entitlement process, which is always a time-consuming thing that we can't really control, I would expect, certainly, a few of these to be hitting the schedules in execution, certainly during 2014. Which ones or how many?
Unfortunately, those are to be determined a little bit more by some of the jurisdictions we're working with and how quickly we can get them to move.
Operator
Our next question comes from Alexander Goldfarb, from Sandler O'Neill.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
Just a few questions here. First, Jim, going back to the debt, you guys have indicated that you want to take out next year's maturities this year, if you can.
Does that apply both to the secured and the unsecured, or is one sort of harder or more costly to -- I mean, I'm assuming the mortgage is probably the one that's harder to deal with, because that's a direct negotiation whereas the bonds have make-wholes that are pretty easy whether you want to do them or not, if they're cost-effective. So just sort of curious...
James M. Taylor
I wish the mortgage were a negotiation. The lender there can expect us to basically prepay all the interest if we go to do that early.
Given the rate on that mortgage, at 7.5%, the earliest that we can repay without penalty is in the May, June time frame. Then we do have the 590 notes that, I believe, mature in the August, September time frame that would be subject to a call with a make-whole.
So there's really not a lot of negotiation with it. It's really more driven by our view of the market at a particular time and the execution we think will be available to us.
Donald C. Wood
So Alex, we would be sitting with cash on the balance sheet, in other words.
James M. Taylor
We would for a period of time. It takes 30 days to call the notes.
And typically, there's a 30-day notification period under the mortgages.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
Okay. Okay, that's helpful.
And then as for the JV, they are 2 small mortgages that come due next year. Do these -- coming due for Plaza Mercado and Atlantic Plaza.
For these coming due, does that present an opportunity to revisit this JV as far as buying out the partner or -- I mean, you guys announced the JV, what, almost 10 years ago, but not really much has happened. So does this present a time to maybe liquidate or buyout or do something with it, with these -- with the debt coming due?
Donald C. Wood
It doesn't enhance the ability to get out of the JV. Frankly, we've got a great relationship with Clarion and don't see the need to.
The properties are performing well. They're very happy with where we are.
And at the appropriate time, one of us will buy out the other. There's pretty much no doubt about that.
We're not -- if we want to force something now, we could force something now. We don't need the mortgage coming due and make that happen.
We just don't see the need to do that.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
And then just, finally, Jim, in the guidance, it looks like the share count is up by 2 million. Is this just ATM usage, or is it sort of assuming some OP issuance for acquisitions?
Or what's driving that?
James M. Taylor
A little of both. Actually, no acquisitions.
Mainly ATM issuances over the course of the year.
Operator
Our next question comes from Tayo Okusanya.
Omotayo T. Okusanya - Jefferies LLC, Research Division
Two quick things. First of all, I noticed, again, during the quarter, you guys didn't really buy anything.
Just curious what the acquisition outlook looks like, cap rates and how you're kind of thinking about that going forward?
James M. Taylor
We've got some good things in the works, Tayo, that we're not really ready to talk about. But from a cap rate perspective, for high-quality core, we really haven't seen any movement in those cap rates, even with the treasuries being volatile.
In fact, if anything, some of the recent transactions that have been announced have surprised us with how low the cap rates have been, including assets in Westport, Connecticut and other things that we've looked at. So -- but we feel good about the pipeline, and the right deals take some time to work.
We hope to have something to announce in the not-too-distant future.
Omotayo T. Okusanya - Jefferies LLC, Research Division
Okay, that's helpful. And then the office component of phase 1 of Assembly Row, any update there?
Donald C. Wood
Beyond -- I'm sorry I was thinking about the IKEA parcel, which I did talk about before. On the building that we're building, lots of interest, and we're working through the process.
That building is behind because we started it later. It's behind the other 3 buildings there.
But yes, so we have a little bit more time to go do -- to get that done. But good interest, I don't have anything to report today, though.
Operator
Our next question comes from Ki Bin Kim from SunTrust.
Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division
Just a couple of quick questions. First on your debt that's coming due, you said you want to take it out preferably this year for the 2014 maturities.
But with the make-whole provisions, from an economic standpoint, besides just making your GAAP interest expense look better, what would the rationale be by paying the penalties and taking that bit out early?
James M. Taylor
When you look at that debt and you look at the breakeven rate, for it to be positive, from an NPV perspective, to take it out early, you don't have to have much of a move in treasuries to have that make sense. If you look at the 2 issues today, it's only about 20- to 25-basis-point move in treasury to be NPV-neutral.
So again, we want to be opportunistic, as we were with our last debt issuance. Hope to able to do it before the end of the year, but we have flexibility to time that as appropriate.
Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division
And should we expect a similar split between secured and unsecured, or more towards unsecured?
James M. Taylor
If you've seen what we've done, really, over the last several years, we're moving to continue to pay off mortgages at every opportunity we can. And our debt balance is largely unsecured and will only get more unsecured over time.
Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division
All right, and just last question. I remember in one of your presentations, you guys showed the occupancy costs at your centers versus traditional malls.
And given where your lease spreads are and where you're signing leases today, how close, especially for your better-quality centers, are the occupancy costs signed at versus traditional malls? And how does that...
Donald C. Wood
Yes, that's a great question. I -- and you're remembering a presentation, I guess, we it did a couple of years back, and I still think it's true today, is that effectively, our occupancy costs, which are overall in the portfolio, not quite 9% effectively, have a lot of room to go.
And I actually think -- I can't really talk about where you're comfortable on the mall side, but certainly, CAM and taxes and those other extras beyond rent are much higher in the closed mall than they are in our centers, even our better centers. And to us, that gives us a competitive advantage as long as we can be comfortable that the sales will be close to the productivity at a mall.
That all still applies. The only thing, I think, that's changed, and I think it's changed for the better, is I believe that retailers have gotten better in terms of their operations, I believe they've gotten stronger in terms of their profitability, and I believe that they can afford to pay a higher percentage of their costs in terms of rent and occupancy than they did, say, years ago, just -- not that many years ago, too.
Now they're not going to tell you that because it's a negotiation and all that. But I think that bodes very, very well for -- particularly for Federal and the types of centers that you're asking about, which are somewhat comparative or comparable to malls?
Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division
And just a follow up on that. So has the actual occupancy cost -- can you maybe give -- provide some numbers, if that's trended up over the past couple of years?
Donald C. Wood
Well, I can't really -- you're just coming in and out. I can't [indiscernible]
James M. Taylor
I think the question is, has the occupancy costs trended up over the last couple of years.
Donald C. Wood
Sure. I mean, that probably -- yes, so our occupancy cost have trended up probably 50 to 75 basis points.
They were in the low-8s. They're probably at 9-or-so now.
And I think -- just coming back to the other point, I think that retailers can pay more than 75 or 100 basis points more than they did a few years ago, too. So I think the general dynamic of the economics are better than they were.
Operator
Our next question comes from Samit Parikh from ISI.
Samit Parikh - ISI Group Inc., Research Division
It is Samit from ISI. Just -- I know it's a little early here to talk about this.
But I think last week you got approvals from the county for phase two of Pike & Rose. And it -- from whatever I read, it sounds like the approvals was for a much larger project than phase one.
I guess I'm just curious whatever you can tell us about what -- at this point, what you're thinking about with that project and regarding how much of phase two do you think Federal will be doing themselves versus maybe selling land or entitlements to an office builder?
Donald C. Wood
Yes, we're not at the point of a big office product -- project at all, Samit. The second phase, I think I've given you some -- a number of about $200 million, give or take.
It won't be a lot more or a lot less than that. It'll be somewhere in that range for the next phase of Pike & Rose.
And the primary thing to do next at Pike & Rose is to build the street. So while in the first phase, the residential really will make or break the project, the second phase, the retail becomes much more important, because it is that street environment that we need for future phases.
So yes, the entitlements and our negotiations with the county have gone very, very favorable, and they include the ability to do a whole lot more over time, but we do it in phases. We do it in pieces, and a $200 million next phase or somewhere in that range, but if it's $250 million or $180 million or something like that, we'll see -- will be primarily our capital.
Dawn M. Becker
If I can clarify one thing for you, Samit, the phase two that we got approved is probably larger than the phase two that we would be building next. There were significantly more buildings that we got -- got approved just because of the development process.
Donald C. Wood
No question. Yes.
Samit Parikh - ISI Group Inc., Research Division
Okay, that makes sense. And then maybe just -- I know you sort of explained it in your Investor Day, but maybe you could clarify it one more time for everyone.
Just the underwriting for the sort of 5% to 6% for fit -- for Assembly, and you can correct me if I'm wrong, doesn't really include anything in terms of percentage rent upside, I believe. And I guess, just curious, Don, do you think?
No, I was going to ask what do you think can get you -- is there -- what type of realistic hurdles are there for upside to get closer to sort of a -- beyond the 5% to 6% up to the higher end of the original 5% to 7% that you had prior to this supplemental?
James M. Taylor
As we laid out at the Investor Day, and thanks for asking the question to me, the rents that are underwritten that get us in that range are about 87% fixed minimum rent, and we do have some percent of sales deals that make up the other 13%. The -- almost all of the leases do have percentage rent factors.
It varies lease by lease, so I can't really get into breakpoints as it relates to the project overall. But certainly, there's potential for upside as the location gets established and the tenants start realizing good sales levels.
So we certainly hope to see that upside from the project once it's open and running.
Donald C. Wood
Yes, let me just add to that, Samit. The answer is time, as Jimmy just said.
But when -- you noticed that we took the 5% to 7% that was in the numbers down to 5% to 6%, and I wanted to specifically address that. That's simply because it will be 5% to 6% in this first phase, in the first -- in the -- after it's all leased up in the first phase.
What -- we do certainly expect that first phase to be yielding 7% or more as the tenants -- as sales increase and that the destination itself becomes proven. Like the first phase at Pike & Rose, there, we think, based on the demand we're seeing, will be an announcement about a second phase of Assembly that does not have anything to do with the IKEA parcel, as we've talked about there, again, to build that street and to create additional critical map.
Those are the things that have to happen to create the upside in the NOI. It's exactly why I showed it in Bethesda in terms of what has happened by stage and by phase over the years.
It's exactly what has happened as we make every incremental investment in Santana. And so that's what I expect to see here.
But when you look at the initial yield, 5% to 6% is much more reasonable today than 5% to 7%.
Operator
Our next question comes from Vincent Chao from Deutsche Bank.
Vincent Chao - Deutsche Bank AG, Research Division
I just want to go back to the leasing and the renewals for a bit here. Just curious on the renewal volume that you did this quarter, how much of that was option exercise versus end-of-lease sort of rollovers?
Donald C. Wood
I don't have it. I'm not sure I could tell you.
We could probably do it offline. I'm looking at Melissa to see if anybody's got anything and I'm seeing -- it's not options?
Melissa Solis
Tell him it's straight out.
Donald C. Wood
Yes, so it's straight out renewals because option renewals wouldn't be in those numbers, right? So it's all renewals, Vince.
Vincent Chao - Deutsche Bank AG, Research Division
Okay. And is there much -- like on the -- obviously, options would be a lower rollover, I would think.
But just can you give us a sense of what the difference looks like?
Donald C. Wood
I don't know.
Chris Weilminster
No. No, I mean, I -- the option exercise, to assume it would be lower, not at all.
Not necessarily. I mean, they're just contractual rents that we've pre-negotiated.
So if you negotiate a 10-year deal with 1 5-year option, you can bet 99.9% of the time that, that option rate is going up. It's not going back.
So we -- so just like Don used as the example, the Best Buy option exercise, that's a great example of it that we anticipated they wouldn't exercise because of where the number was, but they did. And there were no adjustment at all to that option rate, and there was just a significant increase over what the prior rent was.
Vincent Chao - Deutsche Bank AG, Research Division
I'm just trying to get a sense of whether we should be thinking about those spreads differently between the options and the non-option exercise, but okay.
James M. Taylor
I don't think you should, Vince. Think about them the same.
Vincent Chao - Deutsche Bank AG, Research Division
Okay, that's fair. And then I don't know if I missed this from earlier, but it terms of the -- obviously, a lot of development going on.
Just in terms of the overall spend that you expect in '14, what does that look like in terms of CapEx?
James M. Taylor
We did talk about it. It's somewhere between $250 million and $300 million.
Vincent Chao - Deutsche Bank AG, Research Division
$250 million to $300 million. Okay, and then I guess if I just think about the -- going back to the equity discussion about the ATM usage and sort of 2 million of additional shares, that -- depending on how you get to the weighted average, if it's ratably or whatnot, it seems like most of that $250 million or $300 million is being paid for by -- via equity.
Is that...
James M. Taylor
No, that's not right. I mean, we'll probably be somewhere between $150 million to $200 million of equity that may come off the ATM or, alternatively, we might do some asset sales.
It just depends on where the market is. I mean, as we think about our capital plan, one thing to highlight here is that we are conservative as we look out.
We want to make sure that we're match funding and we're not levering up to do it. I mean, if we were rolling a lot of this stuff on to the line, we'd be generating a hell of a lot more FFO growth.
So again, as we look forward, we're not locked into doing ATM issuances, and that's part of the strength of the balance sheet. But conservatively, that's what we would expect to do.
Operator
Our last question comes from Chris Lucas from Capital One.
Christopher R. Lucas - Capital One Securities, Inc., Research Division
Just a quick one, Jim. On the same-store NOI guidance for next year, you guys have been pretty flat on the lease rate over the past x number of quarters now.
What's the composition of that same-store NOI growth for next year? Is there any bump coming from an occupancy pickup, or is that all coming from rent spread?
James M. Taylor
Very modest, if any, occupancy. We do expect some rollover, as I alluded to during the course of the year, which will actually fluctuate our occupancy up and down quarter-to-quarter.
But we're not seeing effective occupancy, if you will, much above where we are today. And to that point, a part of -- that sort of optimum or peak occupancy reflected, in part, the fact that Chris and the team really are driving the rents on the inventory that we have.
So we're -- is it possible that we were to pick up additional occupancy during the course of the year? Perhaps.
But that's not something that we're anticipating.
Christopher R. Lucas - Capital One Securities, Inc., Research Division
So are you guys are running at peak occupancy now, or what's going on with that number?
Donald C. Wood
Look, 95.5% or so is what we -- where we believe peak occupancy is in this -- I'm not using the word peak, I'm using the word optimal occupancy. It may be able to get to 96%.
But generally, we think we get what -- I saw recently, the Tanger numbers are up in the 98s and stuff. That's a -- I guess, in that business, that's possible to do.
In this business, when we find that we're there, we are leaving money on the table. There is a balance between rates and occupancy, just like there is in the hotel business and everything else, Chris.
And so you really have to think about optimal occupancy somewhere between 95.5% to 96% for this portfolio. It doesn't mean we can't get to 96.5% or something like that, but I'm actually critical of that because I want to make sure we're really pushing the rents.
And that's, on a long-term basis, in my view, is much more valuable than giving away space.
Christopher R. Lucas - Capital One Securities, Inc., Research Division
Okay. And just so I'm clear on the definition here, when you say occupancy, you mean the actual physical occupancy, or is that sort of the lease rate number you're talking about?
Donald C. Wood
I think the 2 of those come together. Now at -- so the leased and physical in the ideal world are the same thing.
Obviously, at any one time, they can vary one way versus the other. But I use that, Chris, interchangeably when I talk about 95.5% to 96%.
So I don't want you to think there's no room to go in occupancy. There is room to go in occupancy, and off of where we are.
It's just not anywhere near where our competitors think they can be because it's a different type of portfolio.
Christopher R. Lucas - Capital One Securities, Inc., Research Division
And then just -- can you give us me a sense as to what the spread is right now between the leased and the occupied rate?
James M. Taylor
Yes. 94.6% versus 95.3% lease.
Christopher R. Lucas - Capital One Securities, Inc., Research Division
So that's 70 basis points. Is that -- because it seems a little tight from a historical perspective, but is that...
James M. Taylor
Not. It's not really.
It's pretty much in line. And again, quarter-to-quarter, it can fluctuate based on -- we can have a box rollover and bring down the occupied or go the other way on the lease.
But again, we've been pretty stable, from an occupancy standpoint, over the last several quarters, and I think, really, the point that we want to make here is that we're generating much, if not all, of this growth really through the rollover that we have. And that's the components of the embedded rent growth, the option exercises and the cash rollover growth.
Donald C. Wood
Chris, before you hang up, I just wanted to give you some perspective. I'm just looking at something that's pretty cool here.
In the fourth quarter of 2007, all right, we were 96.7% leased; 95.4% occupied, those were the high-water marks in terms of that. Every other period of time, over the last 10 years, we were somewhere, when you talk about the great days, between 95.5% and 96%.
Operator
Thank you. I will now turn the call back to Kristina Lennox for closing comments.
Kristina Lennox
Thank you, everyone, for joining us on the call today. We look forward to seeing you next week at NAREIT, and have a great weekend.
Thank you.
Operator
Thank you, ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may now disconnect.