Greg Larson – IR
Chris Nassetta - President, CEO
Ed Walter - EVP, CFO
Bill Crow - Raymond James
Steve Kent - Goldman Sachs
Harry Curtis – JP Morgan
Joe Greff - Bear Stearns
William Truelove - UBS
Ricky Pehret - KBC Financial
Celeste Brown - Morgan Stanley
Host Hotels & Resorts, Inc. (HST) Q3 2007 Earnings Call October 10, 2007 10:00 AM ET
Welcome to the Host Hotels & Resorts Incorporated third quarter 2007 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to SVP Greg Larson. Please go ahead, sir.
Thank you. Welcome to the Host Hotels & Resorts third quarter earnings call. Before we begin, I would like to remind everyone that many of the comments made today are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed; and we are not obligated to publicly update or revise these forward-looking statements.
Additionally, on today's call we will discuss certain non-GAAP financial information, such as FFO, adjusted EBITDA, and comparable hotel results. You can find this information, together with the reconciliations to the most directly comparable GAAP information, in today's earnings press release, in our 8-K filed with the SEC, and on our website at HostHotels.com.
This morning Chris Nassetta, our President and CEO, will provide a brief overview of our third quarter results, and then we'll describe our current operating environment, as well as the company's outlook for the remainder of 2007 and next year. Ed Walter, our CFO, will then provide greater detail on our third quarter results, including regional performance and market performance. Following their remarks, we will be available to respond to your questions.
Now here's Chris.
Thanks, Greg and good morning, everyone. We are pleased to report another quarter of strong results for the company. Unlike the first two quarters of this year, RevPAR surprised on the upside at 70 basis points higher than the high end of our guidance, driven by much stronger transient demand than anticipated. The result was one of the best third quarters in the history of our company. We feel good about the fourth quarter and 2008, which I'll discuss in more details in a few minutes.
First, let's talk more specifically about the third quarter results. Our FFO per diluted share for the third quarter increased 36% to $0.38, which exceeded the consensus estimate by $0.05 a share. Our pro forma comp hotels, which included our current comp hotels plus the hotels we acquired in the Starwood transaction, had a RevPAR increase in the quarter of 7.2%, driven by a 5.1% increase in average rate and a 1.5 percentage point increase in occupancy.
Comparable hotel adjusted operating profit margin growth was strong for the quarter, with margins increasing 140 basis points. The adjusted EBITDA of Host Hotels & Resorts, L.P. for the quarter was $292 million, an increase of more than 15% over the third quarter of 2006.
On a year-to-date basis, our pro forma comp RevPAR increased 7% as a result of a 5.7% increase in average rate, and a 0.8 percentage point increase in occupancy. Comparable hotel-adjusted operating profit margins increased 70 basis points. Year-to-date, adjusted EBITDA was $969 million, an increase of over 19%.
For the quarter, comparable food and beverage revenues increased over 5% with strong flow-through resulting in an increase in departmental profit margins of 200 basis points. This strong margin performance is due to continued growth in highly profitable F&B areas including banquet and meeting room rentals. Despite the anticipated softenings in group business for the quarter, we were able to drive higher-rated banquet business, resulting in a 7.4% increase in the average banquet check for the portfolio. Approximately half of our hotels reported double-digit increases in food and beverage revenues, with exceptional performances from the Sheraton New York, the Philadelphia Downtown Marriott hotel, and the J.W. Marriott Desert Springs hotel.
Turning to demand, transient business was very strong during the quarter as room nights were up over 4%, with stronger demand in our premium and other segments of transient, in part driven by stronger than anticipated leisure demand in many markets, especially Boston, New York, San Diego and Orlando. The increase in transient demand, combined with a transient average rate increase of approximately 5.7% resulted in a double-digit increase in transient revenues in the third quarter.
Group average rate increased over 4%. However, as we expected, group demand was soft in the third quarter, and combined with renovation displacement, resulted in only a modest increase in group revenue. Looking forward, we are optimistic that the transient strength we experienced in the third quarter will carry over into the fourth quarter. In addition, our group booking pace continues to look very solid for the fourth quarter, with group revenue forecasted to be up approximately 6% and is exceptionally strong in 2008 with revenue pace up approximately 10%, giving us confidence that 2008 will be a very positive year for group business.
On the external growth front, there's really nothing new on acquisitions in North America. As a result, we would guide you not to include any acquisitions for the remainder of the year.
As we've discussed over the past several quarters, our focus is on investing in our existing portfolio, which we believe is still the best place to allocate capital and will position the portfolio to outperform in 2009 and beyond.
On the disposition front, we'll continue to recycle capital out of lower growth assets at prices that exceed our hold value. Despite the current issues in the credit markets and the increased challenges buyers have faced in obtaining financing, we're making good progress on a number of deals and are maintaining our guidance on dispositions of $200 million to $400 million, some of which will likely close in the first quarter of 2008.
In Europe, early in the third quarter we announced the acquisition of three properties in Brussels by our European joint venture, including the 262-room Renaissance Brussels hotel, the 218-room Brussels Marriott hotel, and the Marriott Executive Apartments. As you recall, the company entered into the European joint venture in March of 2006 and acquired six spectacular European hotels, including marquee assets such as the Westin Palace in Madrid, the Westin Palace in Milan, and the Westin Europa in Regina, located on the Grand Canal in Venice.
In August of 2006, the joint venture added the 483-room Hotel Arts Barcelona, a Ritz Carlton hotel, to its portfolio. The Hotel Arts acquisition, combined with the recent three acquisitions in Brussels, brings the joint venture's total investment the over EUR 1 billion and reflects a geographically diversified portfolio with ten properties in five countries with approximately 3,200 total rooms. These properties continue to perform exceptionally well, and we look forward to growing our business in Europe.
Now let me spend a few moments on the outlook for the remainder of this year and next year. For the full year, we're maintaining our guidance for pro forma comp hotel RevPAR growth of 6.5% to 7.5% and comparable margin growth of 75 to 100 basis points. Based on these assumptions, we expect diluted FFO per share to be between $1.81 and $1.85, including $0.08 per share of expenses related to costs associated with refinancing. Our guidance for adjusted EBITDA for Host L.P. is $1.46 billion to $1.48 billion.
As we look to 2008, we believe the fundamentals of the business remain positive, with demand growth that will continue to exceed display growth. In fact, we believe supply growth will be further slowed by issues related to the current state of the capital markets. Our group booking pace remains strong with good rate growth, and while early in the negotiation process, indications from our managers are that special corporate rate increases will be in the 6% to 8% range.
While we are just beginning our property level budgeting process, our preliminary discussions with our operators and general managers, as well as our review of booking pace and other metrics, indicate RevPAR growth in the range of 5% to 7% for the year, with margin growth somewhat lower than this year.
At this early stage in the budgeting process, we're not comfortable giving guidance on earnings, but we'll provide you more details once we've completed our budget process.
As we've mentioned before, we have instituted our new dividend policy, under which we expect to declare a fixed $0.20 per share common dividend each quarter, as well as a special common dividend in the fourth quarter of each year, the amount of which will be based on our level of taxable income. Based on the guidance we've given, we now expect the special common dividend for 2007 to be in the range of $0.15 to $0.25 per share, resulting in a full year dividend of $0.95 to $1.05.
In summary, we're very pleased with our third quarter results and feel good about the remainder of 2007 and 2008, based on our expectations for fundamentals in the business, including a supply growth forecast that remains below historical averages. We continue to believe that the current growth cycle in lodging will remain favorable. Our portfolio will be as well-positioned as it ever has been to benefit from these strong fundamentals, particularly given the significant investment we're making in our assets.
Thank you. Now I'm going to turn the call over to Ed Walter, our CFO, who will discuss our third quarter performance in a little bit more detail.
Thank you, Chris. Let me start by giving you some detail on our pro forma comp hotel RevPAR results. Reflecting the trend in place all year, our downtown hotels performed the best during the third quarter with RevPAR growth of 8.1%, as we benefited from strong performance in several downtown markets such as New York, Philadelphia, and Denver.
RevPAR at our suburban hotels increased by 6.3% for the quarter, and our airport hotels increased by 6.2%. Our resort conference centers increased by 5.1%, improving significantly from the prior quarter, as occupancy increased by 2 percentage points as compared to the decline we experienced in the second quarter.
Turning to our regional results, consistent with the first two quarters of the year, our top performing region was the mid-Atlantic, which experienced 15.5% RevPAR growth. Our New York City properties performed especially well, with RevPAR growth averaging more than 17%, driven by strong leisure transient demand.
The Philadelphia market also did extremely well, as several major citywide events drove strong group demand, and the popular King Tut exhibit created strong leisure demand. These two factors combined to drive RevPAR growth of almost 15%, one of Philly's best quarters in recent memory. The combination of the slower convention calendar and disruption caused by a comprehensive lobby renovation at our 1,400-room convention hotel will result in weaker performance in Philadelphia in the fourth quarter.
The New York market should continue to perform well, but growth rates are expected to ease slightly in the fourth quarter as our hotels are already running north of 90% occupancy, forcing RevPAR improvement to occur primarily through rate growth.
Our mountain region performed well, with RevPAR increasing by 9.5%, as the Denver market had a strong quarter, driven primarily by solid citywide events with RevPAR growth of over 13%. As a result of slightly weaker group booking pace, RevPAR growth in the fourth quarter in both Denver and the region will likely be somewhat slower.
Our New England region rebounded better than expected from a soft first half of the year, experiencing RevPAR growth of 6.8% as our downtown Boston hotels benefited from strong leisure transient demand. We expect a very strong fourth quarter in the region as our downtown Boston hotels have very solid group bookings.
Overall RevPAR growth in the Pacific region was also solid at 6.7%, with good performance in most markets. The L.A. market performed quite well, with RevPAR up 13%, as occupancies rose by 6 percentage points due to solid group and transient demand. Our two desert resorts, the Westin Mission Hills and Marriott Desert Springs, had great quarters with RevPAR growth averaging close to 20% and our Marina Del Ray properties also did well, posting roughly 18% RevPAR growth. As anticipated, our Hawaii hotels rebounded, posting RevPAR gains of roughly 6%, driven by strong leisure transient demand, and our San Francisco hotels increased by 7% led by our Ritz Carlton, which posted a RevPAR gain of over 14%. The region should continue to do well in the fourth quarter, especially in L.A. and San Diego.
As expected, the Atlanta region had a weak quarter as RevPAR declined by 1%. This weaker performance was experienced across the market in both group and transient segments and generally is attributable to a combination of difficult year-over-year comparables and fewer citywide events. Fortunately, this trend is expected to reverse in the fourth quarter, and citywide events are projected to strengthen considerably, leading to strong RevPAR gains.
Finally, our Florida market also underperformed with RevPAR growth of just 1.9%, due to construction disruption at two of our larger hotels, the Harbor Beach Marriott and Tampa Waterside Marriott, and generally weak demand trends at the Naples Ritz Carlton and Orlando World Center hotels. Unfortunately, Florida will continue to be weak during the fourth quarter as group activity remains soft due to renovation displacement and hurricane concerns.
Year-to-date, the mid-Atlantic has been our best region with RevPAR growth of 15.1%, followed by the Mountain region, where RevPAR growth was slightly in excess of 9%. The Atlantic region, where growth has been just 0.4% and the north central region, where growth was 3.7%, have been our weakest performers.
Looking at our European JV, we had an outstanding third quarter as RevPAR, calculated in euros, increased by 11.6%. Performance has been particularly strong in Barcelona, where RevPAR at our Hotel Arts increased by 22%; and in Venice, where the Westin Europa Regina increased by almost 30%. If calculated in U.S. dollars, RevPAR was up by 19% for the quarter.
For the quarter, adjusted operating profit margins for our comp hotels improved by 140 basis points, our best performance of the year. Profit flowthrough in the rooms department was strong, despite the fact that 20% of the growth in RevPAR occurred because of increased occupancy. As Chris described, our F&B profit growth was also great, as strong margin improvement led to great flowthrough.
Finally, other revenues grew about 11% as parking revenues increased at many hotels, and we benefited from increases at our spas, golf courses, and Internet access sales.
On the cost side, wages and benefits increased by roughly 4.2% and unallocated costs grew by 4% for the quarter. As anticipated, real estate taxes increased by 9% as assessed valuations is begin to catch up with increases in property values. On the positive side, utility costs have declined slightly for the quarter, as did insurance costs. The net result was comparable hotel adjusted operating profit growth of 13%, which represented 47% flowthrough for the quarter.
Year-to-date, our comp margins have improved 70 basis points. We continue to expect that margin growth for the fourth quarter should exceed the pace we have achieved during the first three quarters of the year, leading to full year margin growth in the range of 75 to 100 basis points.
On the capital expenditure front, year-to-date we have invested roughly $375 million in capital items with approximately $210 million representing ROI and repositioning expenditures. For the year, we now expect to spend between $600 million and $625 million on capital improvements, with $315 million to $325 million allocated towards ROI and repositioning expenditures.
We completed the quarter with $559 million of cash; $190 million of this amount will be deployed later this week to repay the outstanding balance on a mortgage loan secured by four of our hotels. The remaining balance of $370 million will be used to maintain working capital of approximately $100 million to $125 million, as well as fund additional investments in our portfolio, acquisitions by the company or our European JV, additional debt repayments, or for other corporate purposes. We also have full capacity on our $600 million credit facility.
As we have detailed today, we continue experiencing great growth on the top line and excellent flowthrough at the bottom line, leading to very strong EBITDA and FFO growth. Our outlook for operating trends for the remainder of the year remains favorable and our company is well positioned to take advantage of any opportunities that might present themselves in the coming months.
This completes our prepared remarks. We are now interested in answering any questions you may have.
We'll take our first question from Bill Crow - Raymond James.
Bill Crow - Raymond James
I know the group booking pace for next year has been accelerating. Has the number of cancellations also been accelerating for next year so that net-net, you're still above? If that's the case, what sort of groups are canceling?
I think the answer is no. We haven't seen any unusual pattern in cancellations in the fourth quarter, frankly, or for '08. There's no typical type of cancellation. Obviously, we periodically have cancellations, but it's really more of a random event than any kind of systemic issue. So the booking pace, when we think about revenue pace being up 10% year over year, which is obviously better than where we were a quarter ago, I think it should be viewed as we view it, which is a very good signal of strong group business for 2008.
Your next question comes from Steve Kent - Goldman Sachs.
Steve Kent - Goldman Sachs
It sounds like the transient customer base is showing strength. When you look out into Q4 and into 2008, are you starting to allocate more and more towards that customer base and pulling back on group? I didn't know how actively you were managing that.
The second question is just on corporate expense, it looked like it came in a little bit light again. Can you talk about what kind of initiatives you have there and what we should be thinking about over the next couple of quarters?
On the first question, group mix, no, we are very actively having dialogue with all of our operators on this issue. I would say year over year on the margin, obviously, it depends on the strategy for each hotel, but if you aggregate all the hotels together on the margin, we're a little bit heavier in group. That is really not because we think transient is going to be weak, but we're still of the belief that many of the hotels that have a little bit heavier group base allows us to measure the transient business that much more aggressively and that the bottom line result will be better.
I think if you look at the year when we finish the year next year, it won't be radically different from a mix point of view between group and transient, but it will be marginally a little bit more group in aggregate.
As I said, there are exceptions to that. Clearly in New York, recognizing that's the strongest market in the country, it's going the other way. We have a very active strategy of modestly reducing the group base in our New York hotels, because we have experienced incredibly strong transient growth and we expect to have that continue. Whether it continues at the pace that it has is unclear. We think it will continue to be strong and on the margin we think having a little bit lighter group representation in that market will lead us to a better result next year.
On the corporate G&A, there are a number of items that are impacting that year over year. The two biggest are last year in the first two or three quarters in the year, we had a number of what I would describe as unique expenses related to the Starwood transaction and the financing related to that transaction, which are obviously not repeating themselves, so that is reducing the G&A.
Another significant component of it is stock compensation. Just based on the formulas that are used, based on where the stock price is today and an expectation of what the management restricted stock program is, honestly, it's just lower based on overall performance of the stock and you're seeing that reflected in the year-to-date results. My guess is, of course depending on where the stock is, you'll see some continued benefit, as painful as that might be to some of us, in the fourth quarter.
Steve Kent - Goldman Sachs
There's no catch-up, Chris, though in the fourth quarter on that part. Because that's the one we were thinking about, is the stock part. It's not like you are shifting some cash compensation?
No, it's ratably done. The impact in the fourth quarter would be driven more by where the stock price goes than anything.
Your next question comes from Harry Curtis – JP Morgan.
Harry Curtis - JP Morgan
Chris, you talked about the group pace for next year looking up in the neighborhood of 10%. Can you talk about where that's coming from? Does it lean more towards renovations? Is it more citywide? Is it just general expectations for economic strength? Is it superior management? What do you attribute to?
All of the above. Harry, I think it's just that we're seeing honestly very good strength, generally, in the group business. We're obviously looking at a situation where you've had pretty good demand growth and it's required, I think for a lot of the groups, that they book a little bit further in advance, because there's not as much availability.
So I think it's been the general strength of the economy, the general strength in the corporate and association side of the business, and then benefited somewhat by the fact that the booking window is getting longer, people have to think about booking business a little bit further out in time in order to make sure they can get their meetings in. But it's no one specific area. Frankly, we're seeing it generally strengthen throughout all our categories.
Harry Curtis - JP Morgan
As a follow-up, can you talk about the hotels that have been in renovation that have hurt your occupancy this year, and what does that look like next year? What I'm getting to with this question is, when do you think that from a renovation point of view, you're really going to be firing on all cylinders?
That's a great question, because I mentioned in our last call that we were going to have the largest CapEx program in our history this year, which is true. You heard Ed describe some of the numbers. What I also said in the last call, and I'm not sure people necessarily heard me, was that while we thought it might taper off a bit next year, we were going to have actually a very large program next year as well as a follow-on to some of the things we've started this year as well as other projects, particularly ROI repositioning projects that we thought had merit and where we were getting great yields.
While it might be a little lighter, honestly, it was going to be not much lighter and fairly comparable to this year. I'm not sure that people picked up on that as much as we'd liked them to have.
In terms of disruption, to answer your question, in '08 versus '07, we think it's going to be generally comparable, given that the program is going to be generally comparable and it's really '09 and beyond where the program, in terms of our expectations right now, drops off more materially and where you start to see the benefit of that as a result of less dislocation and disruption.
Your next question comes from Joe Greff - Bear Stearns.
Joe Greff - Bear Stearns
Chris, just following up on that last comment, and I know you didn't provide '08 CapEx forecast, should we be looking at '08 capital investment, capital spend as similar to '07 then, or should it come down a little bit?
I think it probably is going to be comparable. As you've seen over the last couple of quarters, the numbers come down a little bit, just because as quickly as we try and do these things, inevitably some of them take longer. So over the last couple of quarters, the number for '07 has come down a little bit. We're looking at 6 to 625 now. I think best I know right now and we're finishing that process, I would say the safe number would be comparable to that, maybe slightly less.
Obviously, when we speak with you next, we'll give you a better feel for that. It's in the range of where we are this year and then in '09, the expectation is it would drop off pretty materially.
Joe Greff - Bear Stearns
You mentioned earlier, that included in your preliminary or initial stab at '08 that margin improvement would be less in '08 than you did in '07. When you look at '08 and you try to stress RevPAR growth to margin improvement, what kind of RevPAR growth gives you a push on margins? Is it 3.5%, 4%?
3.5% to 4%. The reason, obviously, we haven't gone through the property-by-property budget process yet. I should say, it's being worked on, but we haven't finished it or rolled it up. That's why we can't really give you a refined sense of where we think we are going to be, but obviously if you just do the simple math and take a midpoint of the range, for example, what we've said next year and compare it to this year, just the arithmetic would suggest margins have to be lower.
But to answer the question, specifically, yes I think the number you threw out is fair. 3.5% to 4%, I think we would be at a push.
Joe Greff - Bear Stearns
One final question and I'll get off. When you look at the 5% to 7% growth for next year, what would that number be without renovation disruption?
It's hard to say and I hate to try and pick a number. I think what I said on the last call is that we were probably 1 to 2 points of disruption this year and given that the program's comparable, it's probably not unrealistic to assume that the impact would be comparable.
Your next question comes from William Truelove - UBS.
William Truelove - UBS
My question was also about margins for next year. Marriott recently, one of your largest operators, suggested they were almost running out of things in terms of cost savings, so it was more just down to pricing. Are your other operators suggesting a similar kind of environment for margins or cost-saving potential for next year as well?
One of the benefits that we have with all of our operators is given the size of our portfolio and the breadth of different operators and brands that we work with, I think we have an opportunity to benchmark everybody against each other and try and continue to push people to find ways to be more efficient. So I don't think there's ever an end to it. Honestly, I think if we're doing our job right, there are always going to be things that we can find with them to become more efficient.
Having said that, clearly with Marriott we together had a major push over the last two or three years to gain some efficiencies in the hotels. Some of the big gains that we saw from Marriott in the last couple of years, we can't keep repeating. We expect to get margin growth, but it is more the arithmetic of revenue growth as compared to a typical expense growth. That's not to say in individual hotels there won't be many, many opportunities to continue to benchmark and find efficiencies.
But I think it is true. I do agree with Marriott, some of the really sizable gains where we've seen last year particularly, probably honestly 50 plus basis points and maybe 50 to 75 basis points in margin gain out of our portfolio with them as a result of our joint efforts on gaining greater efficiencies, you're not going to see those kind of gains. But on the margins, if we're asset managing properly, we would hope we could always find additional things to do in individual properties, and obviously in some of the other portfolios we have, there are other initiatives like the initiatives that we had with Marriott over the last years that we're working on, always with the objective of getting a little bit better margin growth than the arithmetic would suggest.
But in the end, when you look at it across the entire portfolio, while there are these opportunities, they're not as great as the opportunities have been because we've had pretty darn good success over the last couple of years.
Your next question comes from Bill Crow - Raymond James.
Bill Crow - Raymond James
Chris, it looks like you guys are building up a little bit of a war chest here with selling more assets than you buy. You've got a big cash balance and low leverage level. Does this imply anything on your outlook towards cap rates going forward? Do you think the opportunities are going to be better in '08 for either one-off or entity sort of acquisitions?
That's a terrific question. Given what's going on in the capital markets, particularly on the debt side, we certainly would hope that over the next 12 to 24 months there may be some opportunities on the M&A side. I don't think, Bill, that in the short-term we see any really terrific opportunities because those kind of adjustments in the marketplace, frankly, take some time to matriculate through. They don't happen overnight, they don't happen over a quarter, they happen over a number of quarters.
So I wouldn't say we're building a war chest because we think it's going to be a buying bonanza, by any means. I would think there may be more opportunities that would meet our criteria in terms of yields over the next 12 to 24 months than there have been over the last 12 to 20 months. From our point of view, I think what we're trying to do with our balance sheet is just be really prudent given what's going on in the world in terms of where the capital markets are.
Frankly, as we've always said, to make sure that we have a lot of flexibility to be able to take advantage of whatever opportunities come our way. That opportunity may come in the form of M&A. It obviously more recently has come in the form of investing in our existing portfolio. It also may come in the form of buying our own assets, effectively buying back our stock and having the strength in our balance sheet as we do and the liquidity that we do, frankly it just gives us all the weapons in the arsenal that we want to be able to respond to whatever's going on in the environment, to be able to create a significant leap forward in value for the company, in any of those categories. All of those categories, I think, are fair game and the decisions will be made on the basis of where we think we can ultimately, intelligently create the most value.
Bill Crow - Raymond James
Chris, you talked about how the debt market might trim the supply growth expectations going forward. Any markets, as you look out to 2008 where new supply growth is going to be a problem, that we should be aware of today?
None that are unusual that come to mind. You have some of these big assets that are really driving the upper end supply numbers, so when you think about it, you've got the Hilton in San Diego, you've got the Gaylord here in D.C., and you've got Orlando that's getting some pretty big initiatives to supply. So I would say, those drive a lot of the numbers so whenever those are delivering, I think you ultimately have some impact.
The good news is, in most of those markets you have very strong demand and I think the markets can absorb them. Other than the four or five big box additions, I don't really see any markets that come to mind that have unusually significant supply additions that are going to be impacted by '08.
In terms of what's going on in the capital markets, obviously the capital markets are coming back a bit and spreads have come in a little bit and there's a little bit more availability than there was a month ago even, if things continue to stabilize.
Having said that, capital for new development of any sort, in particular hotels, is not really very available, if available at all, in the market today. So certainly anything that's under construction, my expectation, our expectation is will be completed and delivered. But anything that's in the planning stages or the predevelopment or preconstruction phases, if they can't get debt financing, I think a lot of those potential new developments are going to be canceled, more likely be termed postponed, but in some cases canceled, which is not going to probably impact '08 as much as '09 and '10.
But the '08 numbers in terms of supply additions, obviously, '07 is below 1%, '08 is at the high end, a bit above 1%. What we've seen in these numbers is a little bit of ramp up, at least in theory, in '09 and '10. Our expectation, which I think is most definitely supported by what's going on in the debt markets, would suggest that those '09 and '10 numbers are seriously at risk; at risk in a good way meaning that the likelihood is you'll see meaningfully less supply, because if it's not in the ground right now, it's a heck of a lot harder to get it financed.
Your next question comes from [Ricky Pehret] - KBC Financial.
Ricky Pehret - KBC Financial
My questions pertain to the disposition program. First, are you seeing any changes or the timing to realize these dispositions, has it in any way changed from the last quarter? The last part of this question is, are you seeing any changes in multiples for these dispositions or replacement values per key?
That's a great question. We covered dispositions in our prepared comments, but not in the way that you're asking it. There's no question that getting the dispositions done that we're working on is taking longer and it's harder, largely driven by my earlier comments about where the debt capital markets are. They're pretty much impossible on new development and they're very difficult -- getting a little bit easier, but very difficult -- even on existing operating assets. So with the types of assets we've been selling, which are typically airport and suburban assets, which are mainly conversion from management to franchise, it's not a huge group of people that we're really marketing to, to begin with.
While a number of them still can get financing from local banks, they're not really accessing Wall Street in the same way that some of the bigger players are; some others can't. So there's no question that there are buyers out there, but there's no doubt fewer that can get financed than a quarter ago. But as we've said, I did say in our prepared comments, we're still making good progress on a number of those dispositions and we're pretty confident between now and the first quarter of next year we're going to get 200 million to 400 million of those done.
They're definitely going to have taken longer than they would have otherwise, and on the margin for those types of assets, which are typically, as I described, suburban and airport kind of assets in secondary markets, the pricing and the multiples won't be quite as good, for all the reasons you might guess. To the extent that we can't get over our hold values, obviously we don't sell assets.
I think the message in our guidance is that while maybe the pricing has been impacted somewhat and it's taking longer, we still think we can sell those types of assets and the ones we're working on for meaningfully in excess of our hold values.
Interestingly, at the high end of the market, there hasn't been a lot on the market, and obviously we haven't been selling anything at the high end of our portfolio, but you haven't really seen much difference in multiples or cap rates at that end of the market, partly because not much has been transacting, but also partly because there's still, while the debt markets are a little bit dysfunctional right now, the equity markets are fluid and there's still a huge amount of equity capital seeking out high quality real estate assets, including high quality lodging assets. So it's a little bit of a bifurcation in terms of how you look at the lower end, secondary, tertiary types of assets versus the high end, with the lower end having felt some impact and the higher end really, given the demand from the equity side of the business, not having really experienced it.
Your final question comes from Celeste Brown - Morgan Stanley.
Celeste Brown - Morgan Stanley
Chris, can you just talk a little bit more about the fourth quarter? I know you and Marriott management sound pretty confident going into next year, but 3Q is much stronger than expected based on your results, but the fourth quarter numbers seemed to have pulled back a little bit. Is that just being conservative given the lack of visibility or is something else going on there?
No, I think that's part of it. It is what's been going on Wall Street and capital markets, it's certainly a little bit more conservatism. But the way I would look at the fourth quarter and suggest you look at it is, it's still strong. We're obviously, in terms of the growth rate we're projecting, it's still a very strong rate of growth. We feel very good, still, about the group business. Obviously, transient was fabulous in the third quarter and we have an expectation the fourth quarter will be good as well. Net reservation activity certainly suggests that it's tracking nicely.
If you look at the fourth quarter, what's really happening is it's tracking pretty consistently with what we've seen year-to-date. Why it's a little bit different than our expectation is that built into our expectations a quarter or two ago, where it was a little bit of an acceleration, particularly on the group side in the fourth quarter and what you're seeing in our current guidance is some conservatism as you described, given what's going on in the world, but we didn't see quite the acceleration that we would in the fourth quarter. As a result, we're giving the guidance we're giving.
Interestingly though, as I said, we did see acceleration in '08. So while we didn't see it in the fourth quarter, and the fourth quarter is kind of trending consistent with where we've been the last couple of quarters, we did see nice acceleration into '08.
We have no additional questions. I would like to turn the call over to Mr. Chris Nassetta for any additional or closing remarks.
Thank you, everybody for joining us today. Obviously, the third quarter was great. It's nice to have a good upside surprise, both on the top line and the bottom line. As I described and we described, we feel very good about where we are, about the fourth quarter, and feel great about '08. I appreciate you guys spending the time with us today and great questions. Hopefully the information we gave you was useful and we will look forward to talking to you after we finish the year. Take care and have a great week.
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