希爾頓酒店 (HLT) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Hilton Hotels Corporation second-quarter earnings conference call.

My name is Rachel and I will be your coordinator today.

At this time, all participants are in a listen-only mode.

We will be conducting a question-and-answer session towards the end of today's conference. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Marc Grossman, Senior Vice President of Corporate Affairs.

Thank you.

Good morning, everybody, or good afternoon, if you are on the East Coast.

We appreciate you joining us for our second-quarter earnings call and what was a very successful quarter that we are anxious to talk to you more about.

First, let me tell you, though, that the press release that we put out this morning and this morning's earnings call contain forward-looking statements within the meaning of federal securities law, including statements concerning business strategies and their intended results, and similar statements concerning anticipated future events and expectations that are not historical facts.

The forward-looking statements in the press release and in the call this morning are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed and/or implied by the statements herein.

This call this morning is also being web-cast, and you can access the web-cast by going to www.Hiltonworldwide.com, going to our Investor Relations link and then clicking on Quarterly Conference Calls.

There will also be a replay of this call available until August 3 at 8 PM Eastern Time, and that phone number for the replay is 888-286-8010, passcode 96606410, and the call is also being archived on our Investor Relations website.

Now it has been our practice, of course, to jump right into Q&A and get right to your questions, but before we do that this morning, there are a couple of things that we do want to go over with you that are in the package that you received this morning that we put out on the wire.

So, to do that, let me turn it over to Bob LaForgia, our CFO.

Thanks, Mark.

We are certainly very pleased with our outstanding results in the second quarter.

It was easily a record quarter for us.

All parts of our business, our owned hotels, our fee business and our time-share business posted very strong results in the quarter.

On top of that, we did have two non-recurring items that significantly benefited the quarterly results.

However, even excluding these items, we still recorded the highest quarterly net income in the Company's history, and we like making history.

So, I would like to spend a minute or two discussing the guidance.

Based on stronger-than-expected second-quarter results and improved outlook for the remainder of the year, the impacts of both asset sales and share repurchases to date, and the expected sale of the Palmer House in the third quarter, our revised 2005 EPS guidance range is now $1.05 to $1.07.

If you exclude the $0.23 a share of non-recurring items year-to-date, the guidance range is $0.82 a share to $0.84 a share.

Our full-year total revenue and total adjusted EBITDA guidance has been revised to reflect the impact of asset sales, again including the impact of the expected sale of the Palmer House.

You may have noticed that we have included an additional supporting table on the last page of the financial exhibits.

This table reconciles full-year 2004 recorded owned hotel revenue and expenses to amounts adjusted for both 2004 and 2005 asset sales, and again, the expected sale of the Palmer House.

You can use these asset sale-adjusted 2004 numbers to project 2005 revenue and expenses from the new comparable set of owned hotels using our guidance or your own assumptions.

As indicated in the release, our guidance does not include the impact of additional asset sales that may close before the end of the year.

One other piece of information we think will be helpful to you is that we had about 113 million of owned revenue in our prior guidance related to the assets that were sold in the Palmer House.

And the margins on that owned revenue were projected to be slightly less than 28%.

So that, combined with our other guidance, should hopefully help you in your modeling.

So, the takeaway here is that we are successfully executing our assets disposition strategy.

We had a stellar second quarter, and we expect that momentum to carry into the back half of the year.

Now, I will turn it back to Mark.

Thanks, Bob.

So, as we have done over the last couple of quarters, the rest of the time is really dedicated to taking your questions.

I'm joined, as usual, by members of our senior management team.

We are here ready and willing and able to answer your questions, so let's get to it.

Operator, we're ready for the first question.

(Operator Instructions).

William Greene, Morgan Stanley.

The question I had is on your margin guidance for the full-year 2005.

It suggests that margins -- the growth accelerates in the second half.

And I'm curious if you can just talk a little bit about what drives that assumption -- is it more revenue or more costs?

Our RevPar guidance has increased, Bill, so a lot of the improvement in the margins has to do with the fact that we've raised our RevPar guidance by 1.5 points.

On the cost side, we continued to do a great job.

Also, as you'll recall in last year's fourth quarter, we did have some onetime costs related to the rollout of our new bedding program.

That's helping a little bit, but generally, it's the RevPar increase.

It's a better expectation of our group business, which leads to better food and beverage business, and that's basically it.

I think, Bill, also -- this is Mark, but important to note, too, that of the RevPar increase, about 70% coming from rate contributes to that margin growth as well.

Okay, so just so we're clear, though, it's the second half that the margin growth should be faster than the margin growth we saw in the first half as a result of the RevPar?

That's correct.

Okay.

And then just one point of clarification.

There was a comment in the press release about San Francisco performance impacting margins by 80 basis points.

Does that mean that without San Francisco, if we stripped that out, margins would have improved by 240 basis points?

That's correct.

Will Truelove, UBS.

Hey guys, good quarter.

My questions revolve around uses of cash.

I have two questions.

First of all, with the additional eight hotels that you announced that you're looking to sell, is that going to preclude you in any way legally or whatnot from buying additional shares in the second half of this year?

That's always a difficult question when we talk about blackout periods, Will.

We will look to the advice of our attorneys, and at the time that we get down the path of coming close to selling those assets, and make that determination at the time.

Okay.

And then my second question is with these additional eight hotels, the back of the envelope math I'm doing looks like you could get over $1 billion from them.

Have you considered possibly doing a special dividend as a way of returning all this extra cash?

I mean, when you look at your balance sheet, you've already got a lot of cash on there, cash coming from the asset sales plus the ongoing business.

Is that would be a faster way of doing it, the special dividend versus share repurchases?

Yes, well, we've said historically that we're going to look at a number of ways for returning capital to shareholders.

Remember, we're taking a balanced approach in terms of our use of our excess investment capacity and we're going to stay consistent with what we've said previously, and our strategy really hasn't changed at all.

We're going to look at investment opportunities within our businesses, and certainly we are stepping up our investment in the time-share business.

We are increasing the amount of capital that we are allocating to our owned hotels.

But absent investment opportunities, we will look to return capital to shareholders.

I think we demonstrated that in a very big way since the fourth quarter last year.

Since late in the fourth quarter last year, we've repurchased over 300 million of our stock.

We've just recently announced that we've doubled our dividend.

So is a special dividend a possibility?

It's a possibility, but we will weigh that against our other methods of returning capital to shareholders.

J. Cogan, Banc of America Securities.

Good morning.

I guess that's close enough.

I've got a few questions based on the prior questions.

First, why did the buyback decelerate in terms of the number of shares in the second quarter?

Does that have anything to do with blackout windows related to the M&A, or what?

And then also, with respect to the dividend, you obviously doubled it, but off a relatively low base.

Can you just tell us a little bit about what the Board's thoughts are on that, your thoughts on that, and should we expect to see further increases in the near term?

And I have a couple other ones as well.

Okay, sure, Jay.

We thought that we executed very well in the front half of the quarter in terms of our stock buyback.

As we indicated in the release, we bought back just over 5 million shares at an average price of $22.17.

For most of the quarter, though, Jay, we were in a blackout period due to the significance of our non-recurring items in the quarter.

So, we really couldn't be in the market buying stock with that information at hand.

Regarding the dividends, as we said -- as I said earlier, we consider any and all mechanisms for returning capital to shareholders.

We are very confident in the earnings prospects of the Company.

We believe that the dividend increase that we instituted is sustainable over the long term.

And it really would be inappropriate to comment on expectations at this time about future dividend increases.

So we're just going to -- we're very pleased with the Board's action in doubling the dividend, and we will just see where it goes from here.

Jay, this is Matt.

I just want to throw in an editorial comment.

Bob is being very modest here.

We just kind of pass over these non-recurring items.

These were fantastic sales -- huge proceeds and also the tax settlement -- the tax credits we got are big news, too.

It's interesting to me that when I've seen some of the analyst reports, you all just kind of gloss over those, but those are great executions on both sides.

Got you.

And then on to -- back to the San Francisco question and also on the margin question.

Can you talk a little bit about what happened in San Francisco?

I mean, the market, according to Smith Travel, was up between 6 and 7%.

I don't know how you guys fared relative to that.

And for that one property to have such a huge impact on your margins, could you give us a little bit more detail on exactly what happened?

And then in regards to -- and what's the outlook in terms of the back half of the year and next year?

And then in regards to the margins and the RevPar guidance, does any of that have to do with the asset sales and how the mix has changed, or is that's strictly on a same-store basis, you're just seeing that much more acceleration in the back half of the year, both topline and at the margin line?

Are you going to ask about 2006 guidance, too?

No, I will let somebody else ask it.

Okay, San Francisco -- and you live in San Francisco.

You know that there's an ongoing labor situation.

We own a big hotel there.

We have had some cancellations from some groups there.

We anticipate improvement in the back half of the year, but it's hard to predict.

There has been some supply that has come in, more at the boutique end of things.

So we are hopeful things will improve there.

It's not that big a deal to us as a company, but it does impact the margins.

It impacts the RevPar, I think -- if you'd excluded San Francisco, our RevPar would have been up 11%.

So it's something that we watch very carefully.

We're hoping Barry Bond's knee gets better so that the transient business comes back to San Francisco.

But it's probably the only blemish on an otherwise straight-A report card.

And Jay, on your question on the asset sales impacting the guidance, it had a small impact on the guidance.

The new smaller comp set has a higher expected RevPar growth than the previous comp set, but it's not a significant piece of that improvement in the guidance.

And the same thing on the margin side.

The new comp set has a slightly higher margin than the old comp set.

Harry Curtis, J.P. Morgan.

Following up on the question about San Francisco, how do the forward bookings in '06 look like in San Francisco?

I have to get back to you on that, Harry.

I don't have that offhand.

The reason I ask is that a year ago when it looked like Chicago was going to be difficult, you were able to give us some sense that within a 12-month window it would get better.

And I'm just wondering if we have that same sense.

And then the second question I had was if you have any sense of, or are you getting any sense of pricing resistance in some of the markets where you're either close to or through prior peaks, particularly in the group and corporate segment.

Not really.

In fact, we're seeing just the opposite.

The group business is still fairly competitive and price-sensitive in the out years.

And we're kind of at a tipping point where we're evaluating turning some of that off and going more for the higher-end corporate-rated business.

It's very interesting to see for the business book in the year -- for the year -- so business book in 2005 for 2005, our rates up there are very strong -- up almost 13%.

So, you know, you have a balance where you're trying to fill the house, but you still have to have some pricing integrity.

We still have a lot of room to go, too.

If you look at our hotels in New York in particular, where you think, God, it couldn't get any better, we're still considerably below the peak that we had in 2000 in terms of earnings, so we still think we've got a long ways to go here.

Brian Egger, Harris Nesbitt.

I had two questions, actually.

One is just in terms of -- you mentioned the corporated business, maybe shifting more of the mix in that direction.

Any initial sense of the likely direction of negotiated corporate rates for 2006?

And I will just tack on my other question here.

It does look like Chicago has turned around nicely.

With respect to New Orleans, which has been another challenging group market, any sense of a turning point for that market as well?

Let's start at the back.

New Orleans, actually, we've done well.

The city has not been particularly strong, but we've done really well there.

So I'm sure we will just continue with that.

Chicago, as you point out, has been strong, continues to look good in terms of the advanced bookings for 2006.

What was the first question again?

About negotiated corporate rates.

Yes, that was great.

We saw one of our competitors announce what their results to date have been on negotiated rates for '06.

Negotiations hadn't started yet, so that was kind of an odd comment.

But I think that we'll be a lot stronger, but it's too early to say what those numbers are going to be.

Bill Crow, Raymond James.

Hey guys, nice quarter.

A couple of questions here.

Could you tell us the percentage of group business for 2006 that was booked in '04 and before?

Bill this is Bob.

We did take a look at that, and we -- it's a difficult number, really, to get your arms around because you don't know what your total group occupied room nights are going to be for '06, but if we base '06 off of -- an increase off of '05, and you take a look at what we booked, as you said, 2004 and prior, we estimate that around 20 to 25% of the business in '06 will have been booked in 2004 and prior.

That's great.

You have expressed a philosophy or a strategy of reducing your owned real estate EBITDA to make it more balanced with the fee business.

With your picking up the pace in the asset sales, offering another tranche, should we anticipate that that strategy is changing, that you don't mind reducing your owned exposure below the 40% or 45% level?

We're staying consistent with our strategy.

I mean, our strategy that we articulated a year ago is to better balance the income streams of the Company so that the earnings from our own hotels and our fee business each contribute about 40 to 45% of our total EBITDA.

And we also talk about growing the timeshare business.

Assuming that we are successful, and we certainly think we're going to be, in selling these eight hotels, we're going to be down to about 29 owned hotels at the end of the year or early in the first quarter.

So, there may be a few more after this and onesee-twosees, but the bulk of the assets that we've identified -- we identified early on as sale candidates will have been sold by the first quarter of next year.

We have some other properties that are encumbered either by CMBS bid or by leases that we would like to sell and we'll have to wait to get out of those.

But generally, I think with what we've executed thus far and what we expect to execute, we're going to get really, really close to our targeted percentages, and that's kind of where our comfort zone is.

Final question from me.

Appreciate the color on the asset sales in the release on Monday.

Could you translate that trailing number -- that 2004 number to a current-year budget number?

Is that possible?

Is it 100 basis points, 150 basis points different?

Is it more than that?

And then do you anticipate the same sort of multiples on forward asset sales?

I really don't want to comment on what we expect to get on the forward asset sales, and let's just wait and see what happens.

The market is still very strong.

We expect premium pricing on those assets.

Those are quality assets that we announced.

I would hate to speculate about what the multiples or cap rates are going to be on those assets, so let's just wait until that movie plays out.

In regard your first question, in terms of the multiple on kind of full-year '05, I would say that probably slightly less than 100 basis points delta there, between the trailing 12 months and full-year '05.

This is Mark.

Another point, I think, getting back to the first part of your question on the balance of the business, is yes, we've been real successful at selling these hotels, but I think another factor to weigh in is when you think about the big keeper properties, the Hilton Hawaiian Village, New York Hilton, Waldorf, etc., these hotels are seeing big-time EBITDA increases.

They are performing really, really well.

So that's going to certainly weigh into the balance as well.

John Arabia, Green Street Advisors.

A question relating to guidance for management and franchise fee growth.

You provide guidance of about 12%.

Year-to-date, you're up about 18%, and the remainder of the year looks pretty strong.

What am I -- why the conservative estimate, or what am I missing?

That's a really good question, John.

There's a couple of things that will likely impact the year-over-year growth percentage in the second half, first of which is we had a very strong second half of the year last year in terms of our franchise application fees, which is a component of our overall fee number.

We also had a very strong first half of the year, and we just don't expect at this point in time that the application fees are going to be as strong.

And in the second half of 2004, we had early termination fees and change of ownership fees that we don't expect to get in the second half of '05.

The other factor influencing the growth percentage is the fact that the Fountain Blue Hilton came out of inventory in May, so those fees are no longer in the total.

Maybe, Tom, you have more color on that.

I think -- Bob, I think you've hit it.

Our fee business is still strong and will grow at the rates that the Bob said.

Our pipeline is full.

Our brands are performing exceedingly well.

We're going to -- we announced that we will open more hotels this year than we had originally guided you to.

We've raised it to 160 to 170, 21,000 to 24,000 rooms.

And so that part of our business is going absolutely super, and I know most of you guys don't necessarily look at what J.D.

Power reports, but you may have noticed that we've got three J.D.

Power award winners for our Hampton, Homewood and Garden Inn.

And the other three brands, Embassy, Hilton and Doubletree, all showed nice improvements in customer satisfaction.

So, our brands are performing exceedingly well.

Our franchisees and owners are happy.

And our growth is going to be better than we initially told you, and that will continue into '06 and '07.

Justin Clifford, Omega Advisors.

Two simple questions.

Most of mine have been answered.

Here's the first question.

If you had a single financial measure of what you guys do, what would that be, if there is a single one in terms of what we can read.

And secondly, I always ask this on behalf of my Chairman.

Forget the dividend stock repurchase, but what does worry you guys at night, okay?

What can go wrong?

I think the single biggest one is our share price.

Well, I live with that as much as you do.

Okay, and what do we worry about?

Our share price.

I'm wondering what can go wrong in this wonderful scenario?

Many people talk about a real estate bubble, etc.

So--

No, I would say the biggest thing would be some kind of terrorist act of some kind.

Okay, so that's what you worry about at night, and back to the first question.

If there was one metric that you look at that you consider the most important in what you try to achieve, I'm curious as to what that might be.

You've answered many questions.

That's my last one.

I don't think there is a single metric.

It just kind of depends on -- it's a fairly complicated business, and the parts of the business you're talking about.

So, I've been in this business for 30 years, and I don't know a single metric that will in any valid way describe what's going on in the business.

So the traditional things that people look at are all important.

Okay, all right.

Well, that answers it.

Thank you very much, and we love your stock.

Thank you.

Joe Greff, Bear, Stearns.

Timeshares just (technical difficulty) it seems like we've been seeing this for a while now.

You guys have been doing a lot of --

Joe, you are really breaking up there.

Don' know if you have a bad connection, or--

Is this better?

Yes.

Timeshare has just been up a little bit strong for awhile now, and I think you guys have talked previously about looking at a fourth timeshare market.

Can you give us an update on that, what your current thinking is?

And then also, I'm not sure if you gave this or not, but can you just (technical difficulty) any additional potential assets that you can sell, what was the trailing EBITDA on that or (technical difficulty) EBITDA estimate for those?

Okay, let's talk about timeshare, and we're going to try to interpret the second part because you still were breaking up again.

Timeshare is going great for us.

As you point out, we've focused on three markets.

Orlando, we're just continuing to sell really well there.

We are looking for a third sequel project in Orlando.

That's pretty easy, because we know the market so well.

There's lots of land around Orlando and I'm confident that we'll find something really good there.

Las Vegas, as you know, is -- we've got probably a 10-year pipeline there with the big project we have going there.

Sales continue to do well.

We're on our second tower.

We've got two more towers to go, and those towers are bigger than the first two.

So that one's pretty much locked in.

Hawaii is very exciting.

In the press release, we kind of downplayed what we're doing there.

But we did buy considerable acreage around the Big Island.

We picked up some other smaller inventory parcels around the hotel.

But the big parcel there that we want to develop, that's probably a 10-year buildout, too.

High prices, high-profile property, when we get it all figured out, the zoning and so on.

So the fourth one that we're looking at, we're not going to tell you because it would tip off our competitors.

But the profile that we're looking for is something that we can do something that is in a long-season market -- it's attractive to travelers, to vacationers, and that we can continue to build out.

We don't like to do onesie-twosies.

We like to build, stay there, educate the sales force, know what the market is and just build the hell out of it.

So, that's our plan.

Joe, why don't you -- maybe have a better connection.

Do you want to try repeating that segment -- did you get the--.

Joe, if I understood you right, you wanted the trailing 12-month EBITDA from the eight assets that we're currently selling?

Yes, the EBITDA on either a trailing 12-month basis (technical difficulty).

Yes, we're not going to be able to give that information out, Joe, at this time.

When we -- similar to what we did when we completed all of our Phase I asset sales, we will send out the information in terms of multiples and average when we complete all of those sales, but not beforehand.

Jeff Renault (ph), A.G. Edwards.

I just wondered if you all wouldn't mind talking a little bit about the assets sold and those that are identified to be sold, is there a commonality or are there things that you are -- I guess are common to those that are sold versus the remaining -- I think Mark said or someone said -- the remaining 29 owned hotels that will be in the portfolio at the end of this exodus?

I would say that there is two things.

One is we have some that, as Bob said earlier, are in a deal, in a CMBS, have a partner -- there is some issue with them.

And then, another category are ones that are real, real important to the brand, that any sale, you do give up some control.

And so, you think about the New York Hilton -- really important property for us -- the Chicago Hilton, the Hilton Hawaiian Village.

Generally, I would say that that's the profile.

Okay.

And then on the brand initiatives, you briefly talked about the Make It Hampton effort.

Can you just refresh my memory as to what's going on there and when -- I guess it's a second phase -- when that's going to be complete?

This is Tom again.

Make It Hampton was pretty well rolled out in 2004.

It was a two-phase effort.

First phase was in 2004; second phase, which has to do entirely with the bed -- raising it, making it a little bit more residential -- will be rolled out this year and the very first part of '06.

When we started that process, everybody wanted to know what the results were going to be.

And I think if you look at Hampton's RevPar this year, I think it's something like 12.4% in the second quarter.

It's been running at sort of that level the first quarter as well, and Hampton moved back to the number one place in J.D.

Power from the number three place last year.

So, Make It Hampton is indicative of what happens when you do what the brand needs to have done to it, and all of our brands have an initiative like that underway, not the least of which is Hilton and DoubleTree.

So, Hampton is an example of what can happen when you focus on the brand, you work with the others, you get the assets back to where they need to be, and the customers benefit.

And that's another thing that I've been delighted about on the sales, is the guys that are buying them are people that we know, that we like, that are committed to not only keep up the assets, but they are reinvesting in them.

So there is -- and I think, Bob, in the press release you had -- okay, here's the price on the face, but if you add in the CapEx that they are going to put in, which was a substantial number, and that was to demonstrate what the yields are they have going in.

But just as important from our standpoint that these guys are putting money into these properties.

So we're delighted with how all that's gone.

And then one last question on that -- more a housekeeping item.

On the CapEx for the second quarter, can you give me a split between sort of the maintenance piece and what was more of an ROI special project CapEx?

I think there was 48 million after backing out timeshare and the 180?

I would say honestly most of that is maintenance, but it's maintenance plus -- it's the stuff that Tom was talking about.

It's putting in the Hilton Serenity bed, amenities in the bathroom, new sheets, new colors, a lot of serious upgrades to the brands.

Larry Haverty, Gabelli Asset Management.

Two questions.

One, what's the net debt level in the balance sheet?

We said in the press release, 3.6 billion.

And second thing, could you break down where you guys are in terms of Internet reservations and your own site versus the merchants'?

Yes, Larry, Tom again.

We've done very well, and we've started talking to you all about two years ago, about our process.

The second quarter of this year, we were up about 38% on our side in terms of our brand dot-com reservations.

Room nights on third-party sites are actually down, and about 86% or so of all Internet reservations come through our brand sites.

And how much of your reservations now are coming in Internet?

We're just north of 15%.

Larry, I just wanted to clarify on that debt question.

The debt on the balance sheet is 3.6 billion, but you guys said net debt.

Yes.

Okay, so net of the cash, you have to net out -- we had 691 million of total cash and equivalents on the balance sheet.

You have to net that out.

Will Marks, JMP Securities.

First of all, you mentioned in your brief comments at the beginning a dollar number of -- I believe it was a revenue number related to the assets being sold that wasn't included in the press release.

It was a revenue number that had been included in the prior guidance that we gave related to the assets that were sold through July and the Palmer House.

What was that number again?

113 million.

Okay, thanks.

And then, the only other thing I wanted to find out -- on your cash, I guess a two-part question, what have you collected on the announced sales of 400 million or so, how much cash have you -- is not included at June 30 on the balance sheet?

What wasn't included in that number was certainly the sale of the Brunswick property that closed in July.

And then obviously, we haven't closed on the Palmer House yet.

And we expect to close on that property before the end of the third quarter.

And lastly, just on cash, where would you like to be -- what is a safe level of cash or an ample or desired level of cash, since we're expecting all these asset sales and you're expecting them, and we don't know what the proceeds are going to go toward, but I imagine the money is not going to sit in cash.

So maybe at year end, what would you like your cash level to be?

There are such -- that's sort of a loaded question.

But again, we have -- we use our total investment capacity, and it's not just strictly cash on the balance sheet.

We look at our total investment capacity -- the cash, the amounts that we're able to borrow.

And looking at that capacity and making determinations about how we allocate that capital, whether it's between -- investments in the business, new investments and returning capital to shareholders.

So yes, I would say that there's no -- we don't have a targeted level of cash.

It's really more of an allocation of capital.

But it is safe to say your debt level is probably going to remain about where it is, right?

You don't plan on paying off any more debt?

We don't have another significant maturity until 2007.

If we wanted to pay down debt, it would be very expensive, and we're not -- our strategy right now is not to do that.

So our debt level will stay consistent for right now.

Steve Kent, Goldman Sachs.

If you could just talk a little bit about the hotel supply environment, I think it's pretty clear that the upscale supply is low, but limited supply seems to -- or the limited service or the midprice service seems to be increasing.

What percentage of Hilton's 64,000 room pipeline is devoted to the full-service?

Could you break that out maybe a little bit, Tom?

I can if I stop coughing, Steve.

Our pipeline, which is as big as it's ever been -- over 520 hotels and 64,000 rooms -- about a quarter of that is made up of Hilton, Embassy, Doubletree rooms.

So, 75% of it -- three quarters -- is split between Hampton, Garden Inn and Homewood.

Hampton and Garden Inn are the two biggest components of that.

Having said all of that, if you look at the Smith Travel numbers, room supply growth going out to '06, '07, is still historically low by industry standards, and in the industry, not just in the midscale.

What's happening is midscale with food and beverage basically isn't growing at all.

And also, are you seeing because of the pricing dynamics -- is midscale moving up so much further or high enough that it's starting to become attractive for customers to start to stay in the midscale of hotels rather than the upscale?

Or I guess I should have phrased that -- has upscale or luxury moved up so high that you're now seeing crossover into your midscale brands?

I think what we are seeing is what we have seen for long time.

People travel for different reasons.

And based upon the reason, they will pick one of the brands that we've got to stay at.

But if you look at our occupancies, every brand we've got in Q2 was above 76% occupancy.

And Hilton, our own Hilton Hotels, were above 80%.

So, I think you are wrong to think about people trading down.

I think it's better to think about people picking a brand that makes sense for them depending upon the reason they are traveling.

Asad Kazim, RREEF Funds.

I guess from a tax perspective, how much do you guys have left in NOLs?

And then also, you guys have bought some land recently.

So, do that factor in as a reverse 1031?

And then Part C of the same question is, is it possible to do a structured deal with some of these REITs that want to put money to work and maybe take their equity and maybe just distribute it to your shareholders and establish a higher value for your real estate versus what the market is giving you credit for by taking very high multiple REIT stock?

I have three parts there, Asad.

On the NOLs, we've used up all of our available net operating losses, and most of those were related to the sale of Red Lion a number of years ago.

So, we have used all of them up and applied them to our Phase I asset sales, as you saw in the release.

In terms of the 1031, we are effectuating a 1031 exchange with both -- part of this Phase I asset sales and the Palmer House.

And we are effectuating that exchange on the purchase of the two land parcels in Hawaii -- you know, the 62 acres of land that we bought on which the Hilton Waikoloa Village is located and the 112 acres of land that we bought -- okay, actually near the Hilton Waikoloa Village.

So we are sheltering a significant amount of the tax gains related to the assets -- Phase I asset sales and the Palmer House by doing that 1031 with those two land acquisitions.

The third question on structuring a deal with one of the REITs here, we are really very comfortable with the strategy of this Company and the way we've outlined it through our investors in terms of our ability to sell assets at very attractive prices and look for investment opportunities within our business and return capital to shareholders.

We've looked (technical difficulty)

Thank you so much.

Felicia Hendrix, Lehman Brothers.

A lot of (technical difficulty) answered.

But I do have one remaining, and that is as you're looking out to the rest of the year and to the extent that you do have strong visibility, and I realize that's a little bit difficult given your business, besides San Francisco, are there any other areas of weakness both regional and seasonal that we should just keep in mind as we think about modeling going forward?

No.

That's it?

Okay, well next time, I will give you a harder question, but that's it.

No, that's a fair question, but I told you the only blemish on our report card for the first half has been San Francisco.

And we had a difficult first quarter in Chicago, as we had expected.

But Chicago is coming back.

It had (technical difficulty) quarter.

The advance bookings are very strong.

Yes, we expect it to be up for the remainder of the year.

All of our other markets are looking very solid.

Really good.

And then so given the experience in San Francisco, obviously it's really hard to predict what's going to happen with all the other cities where labor contracts become an issue at the end of next year.

What are you doing to prepare for that?

We're doing a lot of things.

You know, Felicia, it really is a fluid situation.

We've dealt with labor situations before.

We know how to operate during them.

We'll continue to do that.

But to try and speculate on what's going to happen or what impact there would be, etc., probably is just not a very productive exercise.

Andrew Cole (ph), JL Advisors.

Just want to ask you -- just a point of clarification on your EPS guidance.

Does that include the effects of any potential stock buybacks?

No it doesn't.

So then hopefully there can be some upside if you guys continue on your buyback base?

That's true.

Thank you, sir.

Ladies and gentlemen, this does conclude the question-and-answer portion of your call today.

I would like to turn the presentation back to Mr. Marc Grossman and the management team for any closing remarks.

Okay, I think that's it.

We appreciate everyone joining us this morning.

As usual, if you have any follow-up calls, contact me or Atish and we'll be talking to you later.

Thanks again.

Bye.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the presentation, and you may now disconnect.

Have a wonderful day.