希爾頓酒店 (HLT) 2005 Q3 法說會逐字稿

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

My name is Annemarie and I will be your coordinator for today.

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

We will be conducting a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Mr. Marc Grossman, Senior Vice President of Corporate Affairs for Hilton Hotels Corporation.

You may proceed.

Thank you, Annemarie, and good morning, everybody.

We appreciate you joining us this morning to talk about what we believe was just an outstanding third quarter for our Company.

I am joined, as usual, by members of our senior management team who are ready to answer your questions.

But before we get into that, let me just remind everyone that the press release that we put out this morning and this morning's conference call contain forward-looking statements within the meaning of federal securities law, including statements concerning business strategies and their intended result and similar statements concerning anticipated future events and expectations that are not historical facts.

Forward-looking statements in the 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 in or implied by the statements herein.

Let me also tell everyone that this call is being webcast.

To access the webcast go on www.Hiltonworldwide.com, click on Investor Relations and then click on the conference call link.

This call will also be available via playback, and that will be available until November 3, at 8 PM Eastern time.

The playback number is 888-286-8010 pass code 78295941.

So you know that our format over the last several quarters has been to jump right into Q&A.

We think that is a format that has worked well for everyone, makes the calls more efficient.

We've gotten good feedback on it and that is something we intend to continue, but there are some subjects we know that are top of mind with everyone, so we want to cover off on those before we launch into Q&A.

The first one, obviously is the announcement we made a couple weeks ago that we are in discussions with Hilton Group regarding a potential acquisition of their hotel business.

We understand there are lots of questions, there are lots of things people want to know about it and a real desire for more on that but we do not have an agreement and as we said in that announcement, we're just not able to say anything more at this time.

So again, we can appreciate the desire, the need to know more, but we're just going to have to hold off for the time being and we appreciate your patience on that.

The other subject we want to cover off on is New Orleans and other hurricane related items, and Matt Hart, our President and Chief Operating Officer will talk about the operational aspect of that, and Bob LaForgia our CFO, will talk about economic impact and specifically with regard to New Orleans the insurance situation.

And then item number three, Bob will also cover off on our guidance for full year '05 and our preliminary look at full year 2006.

So that is the agenda before we jump into Q&A.

So let me turn over it over to Matt.

Okay, Mark.

Thank you.

As you know, many of our hotels were affected by the three hurricanes.

Most of the hotels that were affected were franchised and some managed, and they are covered by the owners' business interruption policies and as Mark said, Bob is going to cover that.

Just in terms of operations, we've done a terrific job of taking care of our guests, getting them out of danger, helping them get home.

The biggest affect that we had of course was in New Orleans, so let's start and talk about that.

We own two hotels in New Orleans.

We own the Hilton New Orleans Riverside, which is the large property in town.

We own 75% of the hotel.

At this point, the cleanup from the hurricane is complete.

We have some reconstruction activities under way.

We should be complete in the first quarter of '06.

We do expect to begin taking reservations, from transient customers December first of this year.

At this point, we do have most of the hotel open.

Those rooms are occupied by rescue workers, by some of our team members and on average the rates are about 20% below what they had been or against what they were this time last year.

We are starting to take some local and social catering events, starting in December.

And business for Mardi Gras is quite strong.

We expect to turn a small profit in the fourth quarter.

For full year we will be off by around 25%.

Going to the airport hotel which we also own that property has been quite busy throughout.

We will start taking reservations for transient guests starting November first.

We have some social business there, too.

And actually for the full year we will probably be about up 20% over last year, and we're probably going to be fairly strong in 2006 also.

We have a couple other properties.

We manage a Doubletree downtown.

They have got a big contract FEMA through 2006, and they will be up for this year also in the range of 20%.

And probably looking pretty good for 2006.

Beyond that, it is hard to really know; the convention center, as you know, remains closed.

They expect to reopen in May of 2006.

And if we have to guess, we think that the 2006 earnings will be approximate to about 2004.

So we will lose a year or so there.

But we are generally optimistic that New Orleans will return to prehurricanes levels probably the year after that.

So I'm going to turn to Bob and let him talk about the insurance.

On the insurance side, the insurers under our policies have acknowledge coverage, and their adjusters have preliminarily estimated the losses at our two owned properties in New Orleans.

Todate, based on all the information received from our carriers, we believe we will recover all of the costs associated with Hurricane Katrina less the deductibles.

Under our building and content policy where we have a deductible of 6.6 million, the loss estimate provided by the adjustor is well in excess of the book value of the damaged assets even after applying the deductible.

As such, there is no net impairment charge in the quarter.

Additionally, our policy includes what is called "extra expense coverage" which includes full reimbursement of exceptional costs including additional payroll, security, cleanup and other costs incurred as a result of the hurricane.

As we are covered for these costs as well, there was no P&L impact for any of these extra expenses that we incurred in the third quarter.

Under our business interruption policies where we have a deductible of about one million, the situation is similar.

Based on the loss estimates provided by our insurers, proceeds under our BI policy are expected to be in excess of the projected operating losses, even after application of the deductible.

As a result, we were not required to reflect the September operating losses of our two New Orleans properties in our quarterly earnings.

When the loss is finalized and all contingencies related to the loss are resolved, we expect to report an insurance recovery amount equal to the lost profits during the BI period net of the deductible, and we expect this to occur in 2006.

And as Matt mentioned, to the extent that we had lost fee income as a result of the hurricanes, we are covered under our owners' BI policies.

In the third quarter, we estimate the impact of lost profits as a result of Hurricane Katrina plus our contribution to the Hilton employee relief fund and the Red Cross to be about a penny a share.

Turning to our guidance, first for full year 2005 we are now expecting total adjusted EBITDA to be in the $1.13 billion range.

This is at the low end of our previously issued guidance due primarily to the impact of Hurricane Katrina.

Our New Orleans properties were on track to meet their forecasts and given strong third quarter results in our other major markets and in our other businesses, we have fully expected to be at the top end of our previous guidance.

And of course Hurricane Katrina changed that.

For our comparable owned hotels, we are expecting to end the year with RevPAR growth of about 11% and margin growth in the plus 180 basis point range.

Our expectations of margin growth are also at the low end of our previously issued guidance due primarily to two factors, first the escalation of energy costs is higher than what we had expected, and second, the two New Orleans properties impacted by the hurricane and the Hilton Boston Back Bay which we just sold were taken out of the comparable owned hotel mix.

The fee business continues to be a strong contributor, and we expect to end the year with record fee revenues by a wide margin, we now estimate full year 2005 fee growth to be in the 15% range.

On an earnings basis we expect 2005 reported diluted EPS to be in the $1.05 range and returning EPS to be in the low $0.80 range.

On a per-share basis, Hurricane Katrina impacted our previously issued guidance by about $0.02 a share.

For 2006, as we noted in the press release, our budgeting process is in full swing, but not yet complete.

However, based on preliminary expectations from the field, we are currently estimating RevPAR growth in the 8 to 10% range, driven primarily by higher average rates across all business segments.

On an earnings basis, we are currently estimating $0.97 to $1.03 per share.

Our estimate assumes completion by year end or shortly thereafter of the sale of the remaining seven assets that are currently being marketed.

Our estimates also include the impact of roughly $0.02 a share to the required accounting change related to the expensing of unvested stock options.

And finally, our assumptions do not include any of the insurance recoveries related to this year's hurricanes, nor does it include the impact of any share repurchases or other transactions.

All in all, we expect to end 2005 on a strong note and expect this positive momentum to carry us throughout 2006.

And with that, I will turn it back to Mark.

Okay, thanks guys.

So Annemarie, we are ready for the first question.

(OPERATOR INSTRUCTIONS) J. Cogan, Banc of America Securities.

Maybe if we could just focus on the 2006 guidance a little bit.

A couple other numbers would be helpful.

One, could you tell us roughly what same-store owned hotel EBITDA margin growth you're looking for?

And then also, what is the EBITDA -- the adjusted EBITDA number you guys are working with on that guidance?

I don't think either of those were in the press release.

And we noted that we are very much in the preliminary or initial stages of our budget process.

We traditionally have given only the top line RevPAR guidance and EPS guidance this early in the game.

Basically what we did was we polled the field and we asked them what their expectations or RevPAR are going to be, and really that's it.

We applied kind of corporate level adjustments and follow-throughs and made some estimates with regards to our other business, but we are really not in possession of that information yet.

So we are not in a position to provide any additional guidance beyond what was in the press release.

Okay, and just as a follow-up, with respect to the EPS number, I know we have the stock option expense already in our numbers because you guys had talked about that way back when when folks thought it was going to be implemented sometime in 2005.

And so I'm wondering is there anything else going on within the business because the overall '06 number, while early, did seem a little bit like I think relative to where the Street expectations were.

Is there anything else happening within the P&L that we should be aware of other than what you've talked about?

Nothing unusual.

Again, we kind of did apply topline factors to it, and there is nothing unusual going on.

If you noted the EPS impact on the options, but beyond that there is nothing unusual.

Bill Crow, Raymond James.

If Steve is on the line, I would certainly like some color.

Non on the details with the potential transaction with Hilton Group but maybe on the strategy, the thinking behind it and the timing.

Well, Bill, I'm afraid -- this is Steve -- we really are not going to be able to comment on the negotiations we have going on other than the fact that as we said in our press release and as Hilton Group said, we are in negotiations with them.

So as soon as we can tell you something, we will.

Let me go back to just some mundane questions then.

The seven assets that are anticipated to be sold in the fourth quarter, could you give us some idea of the impact to EBITDA or potential EPS in '06?

That's not a mundane question.

Relative to the other things that are going on.

Just in terms of all of our asset sales that were executed and we expect to execute in 2005, from an earnings perspective it is about neutral.

But in terms of the EBITDA, on the last earnings call we did give some information in the back of the press release to kind of help you get to the comp numbers for 2005, adjusting for the asset sales I believe through July plus the Palmer House.

And at this point in time, since we haven't completed the asset sales as of yet, we are just hesitate to give the EBITDA impact at least (indiscernible) going away in 2006.

So if you wouldn't mind to stay tuned, and we will hopefully will be in a position, better position to give you that information on our next earnings call.

What sort of recovery do you anticipate in '06 from insurance settlement on the hurricane issues?

That is a tough one to estimate at this point.

We are, as I mentioned in my opening remarks that we are covered for all of the lost profits from all of the operations.

And less a deductible of $1 million.

So we have been -- the insurers are still quantifying it.

The most important thing is that they have acknowledged coverage.

And so at this point in time, that is a difficult number to estimate.

But we continue to work with our carriers to firm up that number, and I am sure we will have something to report next year.

Joe Greff, Bear Stearns.

Just a follow-up question for Steve.

The discussions with our friends over at Hilton Group, are they exclusive discussions?

No, Joe, I'm really sorry, but there is just nothing we can say about these discussions.

It's just the way the world works today.

We simply can't comment on it.

This is a somewhat related question I think you can answer it.

I got a prediction for you, Joe.

No, no, no, this is a reasonable question.

The expenses that you guys are incurring, are those included in your 4Q and your '06 number to the extent they would kind of go out that far with bankers or lawyers or other folks you have involved and other costs that you are recognizing as a result of having these discussions?

The accounting at this time for those costs is that we are putting them on the balance sheet.

And what is that total so far?

Sorry, Joe, can't comment.

We should have had an over and under on questions on Hilton Group.

Great.

I'm sure not the last one.

Have a great day, guys.

Steve Kent, Goldman Sachs.

Two or three quick questions.

Your '06 outlook, just to give an idea of how strong or how much upside there is to that number, what percentage of your bookings were made during the '01 '04 period where things were a little bit lighter, so that how much is really available to really cater to that transient traveler who seems to be more than willing to pay pretty high prices?

So give us some color on that.

Also, Starwood's comments yesterday that they are in the market for 2 to $4 billion of asset sales, does that do anything to your asset disposition program?

Do you accelerate it to sort of beat them to the market, or sort of what is your view on that as it relates to your asset disposition?

Thanks.

We estimate that about 25% of next year's group business will have been booked in 2004 and prior.

I think that covers the first question.

Let me just add to that it is not just the transient business that is the upside.

The real upside is in the short-term corporate bookings, because what comes with those is a lot of food and beverage business.

And what we are finding is that its kind of the silver lining in the short booking window situation is that when you have the space, you've got the leverage.

So those small company meetings are a very big part of the equation.

Will be in '06.

For the two of you then, what percentage overall is either group because Bob you said 25% of your group bookings, but what percentage in your hotels is group versus just independent travelers?

Can you just keep us updated on that?

Roughly 35% -- 35 to 40% depending on the year is group business.

And of that amount about 40% is related to what Matt is talking about on the company meetings side.

Okay.

Thank you and then the second question, any view on sort of real estate transactions what it means?

This stage two we call it on asset sales -- these seven remaining assets -- you know we have lots of interested parties looking at these assets.

We had 8 going into the quarter; we sold 1 to Boston Back Bay.

We don't think that Starwood announcement of their intended asset sales really upsets the interests that are currently surrounding our properties.

And after this phase II we may have one or two more asset sales to go but we are pretty much done.

We had some properties, as I mentioned on last earnings call that we would like to sell but they are encumbered if you will, with either pretty difficult land leases, or they are encumbered by our CMVS steel.

So we are pretty well through the majority of our asset sales after we complete these remaining seven.

Steve, when you think about it, we currently, if you look in the back of our press release, you have 36 hotels that we own currently, so we are marketing seven.

That gets us down into the '20s in terms the number of owned hotels.

So that's probably right around the right number because the ones that we are continuing to own are the big ones we want to continue to own -- the New York Hiltons, Hilton Hawaiian Village, etc.

So we are pretty well along.

Will Truelove, UBS.

Assuming there is no transaction, just sort of business as is going forward, Steve, maybe you could tell us what would be the biggest shortcomings of the strategic alliance that you have with Hilton Group?

I think its always what we've talked about in the past is that we think that because of our good working relationship and our strategic alliance with Hilton we can accomplish our most important objective, which is from a guest point of view to have them view a Hilton as a Hilton no matter where they find it, whether it's in London or New York or Tokyo.

And so we have been very successful in accomplishing that part.

I think that what we have also said is that our current structure I think often disappoints in that people often ask us are you an international company.

And we are in this kind of unusual way of this strategic alliance and it is not as satisfying to the questionnaire as it would be if we truly were an international company.

But it is something we've dealt with very, very well over at least 10 years.

We've dealt with it not so well prior to that, but we've dealt with it very, very well.

So I think the way we are structured now is a -- as I said, we've done fine.

And then just one housekeeping question.

Of the 958 million of cash on your balance sheet, how much is restricted and how much is unrestricted?

I wasn't sure.

The 958 million, 404 million is restricted cash.

We still have some moneys left in related to the 10/31 exchange activity.

I would expect that by the end of the year the amount of moneys left in our restricted cash will kind of be the more normalized amount of about 160 to 170 million.

And again, those are made up of generally of our timeshare deposits, as well as some of the moneys held in the cash trap (indiscernible) financing.

David Anders, Merrill Lynch.

Can we talk a little bit about the expenses because many launching companies are giving us great RevPAR, but it seems like the margin guidance or implied margin guidance for next year, is a little, coming up a little light.

So now if I looked at your press release correctly, it looked like your comparable expenses are going up or went up about 7% if I look at the nine months ended, or I guess I would say 9% on the trailing three months.

Can you comment a little on what's driving expenses -- also believe you highlighted on a per room basis it was up 5.3%.

Can you walk us through some of the breakdown on those expense lines?

Specifically for the quarter, as you mentioned, if we are up 5.3% on a cost per occupied room, and that is really kind of how you have to look at it.

Because of all the asset sales and things impacting the other quarter-over-quarter results.

Generally on the wage front we are pretty much in line with what our expectations were.

A lot of what is impacting our CPOR this year compared to last year is energy costs.

For example, in the third quarter energy costs were up 16%.

And that was about 40 basis points of our CPOR increase just purely with energy, and of course that is an expense that is very difficult to predict.

And so sitting here today, if you asked me what energy costs are going to be in '06 I just don't know.

It is a volatile expense number, and it is certainly one that we're very concerned about.

The other thing is, and again strictly in reference to the quarter, was the property taxes.

If you recall last year when we announced our earnings we indicated that we had some property tax credits come through in a number of our owned properties.

So that impacts the year-over-year comps, and that impacted our CPOR increase by about 50 basis points.

And also, as we've kind of talked about all year that we have increased our Hilton brand marketing costs and that has contributed to one of the reasons why our CPOLR is up in the third quarter, again speaking specifically to that.

That was about 25 basis points of our overall increase.

But generally I think you could expect on a per occupied room basis for costs to be up in the 3.5 to 4% range.

And the wild cards again are mostly energy.

Just to be clear, so if I took your expenses from owned hotels and divided by the number of hotel rooms, that is going to give me the cost per occupied -- there's no other expenses in that category which is your owned hotel?

No, its total expenses; it is not expenses to the house profit line.

Its total expenses to the EBITDA line, and you want to divide through by occupied rooms, not total available rooms.

Will Marks, JMP Securities.

I was just wondering if you could comment on kind of your group business for the quarter and also on what you're seeing with regards to New Orleans business and how you -- are you seeing a shift to other Hiltons, are you seeing a shift to other cities and if you could just comment on that?

In the third quarter we had a great performance on the group side.

Our room nights were up 4.5%, and our room rates were up 7%.

For 2006 we're seeing pretty good rate improvement in the high single digit kind of numbers.

So we're pretty optimistic about '06 on the group side.

But as Steve Kent had talked about before, a lot of that comes a little late, and a lot of it we anticipate could come from the smaller corporate groups.

And then in terms of displaced business, in New Orleans, about 20 to 25% of that business has gone to some of our other properties, San Antonio, Dallas, Houston, Chicago, San Francisco, Washington.

We've picked up probably about 10% from other sources.

And the remainder about 60, 65% is canceled.

Could you also comment on your corporate negotiations and what type of rate increases you guys are seeing there?

That's what I was referencing for the 2006 timeframe.

Got it.

And also are you able to comment on what type of EBITDA multiples on the disposition of your seven hotels?

Not at this time.

We will likely do what we did previously.

As soon as we complete our Phase II asset sales we will send out a press release indicating the aggregate proceeds and multiples, cap rates, etc.

Bill Lerner, Prudential.

What is your guidance for '06 contemplate with respect to labor contract expirations?

Does it assume that there will be no abnormal change to your cost structure, specifically insurance and labor?

Obviously there is no prediction about any disruption if any but just wanted to gauge the sensitivity.

The answer to your question is our assumptions are that there is no abnormal change in the wage structure, and there is no anticipated disruption.

Susan Jansen, Lehman Brothers.

This is Lee Mahon (ph) on behalf of Susan.

In terms of if there were to be an acquisition, how far would you guys consider stretching your balance sheet credit ratios and (inaudible)?

You know we are right back in that same box.

We are not going to be able to answer questions about a possible transaction here.

That is to the over and under number.

William Greene, Morgan Stanley.

On the owned hotel side as you look at these hotels you've sold, can you estimate what effect it had on your owned margins?

Was it immaterial to the change in margins?

On the hotels that we've sold year to date you mean?

Yes or even those that you've contemplated selling these remaining seven, will it have a positive or negative impact on comparable hotel margins as they come out of that comparable figure?

Yes, that is a great question.

We haven't run that exercise, though, on an earnings basis it's about neutral.

Well, here is what I am trying to get at.

I understand what you're trying to get to.

I'm assuming that the hotels that you're going to keep are some of your better performers.

So I'm wondering if it would mean that we could have an acceleration of comparable owned margins in terms of growth or even could we exceed former peak margins.

How do you think about that?

I think you're right.

I mean, a lot of the hotels that we expect to remain in our ownership base typically do run at higher margins than the properties that we've sold.

So we would expect there should be some benefit in terms of our reported comp owned hotel EBITDA margin.

I just don't know what that number is at this point.

With regard to peak margins, I think it is a bit of a mix.

We are like in Hawaii for instance, we are well above peak margins.

In New York we are currently below peak margins.

Other markets we are above; other markets we are below.

I really think that while it is certainly interesting and it is an important metric to keep your eyes on our own company margins, I'm sorry our own property margins, I think the other interesting data point is what our total company margins are.

As we shift our mix of business through asset sales and taking back contracts on those asset sales and by growing our fee business, I think what you're going to find is that we are going to hit our peak company margins a lot quicker than we're going to hit our peak owned EBITDA margins.

If you look at our peak company total company EBITDA margin in the year 2000 was 36.5%.

Based on our guidance this year, our total company EBITDA margin is going to be 35.5%.

So we are only 100 basis points shy of fee company margins.

I think really that is what we're going to have to focus now.

Larry Haverty, Gabelli Asset Management.

Hi, Steve, Mark, Matt, I am just curious as to what the net debt is at the end of the third quarter, cash and debt.

I think that was put in to the release.

3.6 billion of (multiple speakers).

Net of 100 -- I'm sorry -- 958 million of cash.

Okay, and I was recently in Hong Kong, it seems to me that investors may be underestimating the brand quality of the Conrad brand.

You have a beautiful asset there, and I was on a number of websites.

Could you comment on that, whether this is just not getting the credit it is due because it is kind of amorphous and in the joint venture?

Yes, I think absolutely that the Conrad probably doesn't have the profile that it should with investors.

And I think the real issue is that for many years neither our company nor Hilton Group devoted much attention to Conrad.

And in the last year, year and a half, we've agreed between us to do just the opposite and devote a lot of attention to it.

But you're absolutely right, the properties that are in place are beautiful.

And I believe that with some dedicated effort in this Conrad brand over the next five or so years, maybe a little bit longer, we can become a serious competitor to the very best brands in the world, like Four Seasons.

Larry, the Conrad that just opened maybe a year or so ago in Bali has won all kinds of awards.

It is just a terrific hotel.

We just announced another one in Tokyo that just opened that's a great hotel.

Management contracts were just signed for Jakarta, Bimini.

I mean just -- so the brand is -- we've got Las Vegas and Indianapolis kind of on the boards here.

So a lot going on with Conrad, but you've got to --.

Chicago?

Chicago is another one.

We've got to get to a point where there is some critical mass, and we think we're getting there.

And then last, does New York look as good for you as it does bad for me as a frequent customer?

Could you perhaps give us some numbers about what's going on there?

Larry, we call it getting even.

I know that.

New York is extremely strong, and the outlook continues to be very strong.

We're going to reopen a nice restaurant for you, though, in the next week, Larry.

We're going to reopen Peacock Alley at the Waldorf-Astoria, and that is going to be great.

The real story in New York is what we are seeing throughout the country, but there especially is diminished supply and extremely strong demand coming in from international travel and from business and group travel.

What kind of RevPAR are you seeing there, growth in New York?

We didn't specify, but we're in double-digit growth there.

Very nice double digits in New York for the quarter.

J. Cogan, Banc of America Securities.

I couldn't resist.

With respect to the cost pressures, just one more time and also maybe one on the unions to kind of follow-up on that.

Bob, can you tell us what the energy costs were up in the first half of this year?

And I guess the fourth quarter is probably going to look more like the third.

Yes, my recollection, J., is that we were up kind of in the high single digits in the first half.

Maybe low doubles.

I would estimate I don't have the numbers in front of me, but I think it would probably be in the 9 to 10% range in the first half and second half its going to be 13 to 15.

What is the working kind of broadly understanding of what you said before about margins; but roughly what is the expectation for 2006 energy price increases, still single digits or double digits?

How are you thinking about that?

Sitting here today I am thinking that they are double digits but we are still again putting our numbers together.

The hotels are, our operators are putting the numbers together and making an assessment in each market of what their expectations in energy costs are.

I would expect them sitting here today to be in double digits.

And exiting out any of the issues related to the unions, are there any other cost pressures that are kind of in that high single digit range next year, the low double-digit range and whether it would be insurance or anything else like that?

Again, not at this point.

I think we have done a really good job on the benefits cost and so on.

A year and a half ago that was the big issue, and we have done a very good job in maintaining and slowing the rate of growth there.

And keeping our employees happy.

Okay and with respect to the -- (indiscernible) want to address this or broadly, but given that the staggered nature of some of these renegotiations and the tendency historically to be dealt with at the local level, can we expect to see any progress on a near-term basis for Hilton or the industry?

Or are we going to have to just kind of sit and see how things go market by market as we go through the year 2006?

We just had a settlement of a situation we had up in Oakland this week.

So from time to time there can be progress made.

But I think the union has a view of trying to make this a national issue.

It has been pretty obvious.

We think they should be addressed city by city.

But all of the hotel companies recognize the issues that are being brought forth here, and we are all working together just as the union is.

So it is hard to know what happens there, but we are very, very cognizant of the issues and the situation that we face.

Mark (indiscernible)

Can you comment on the importance of maintaining an investment-grade credit rating in the context of executing your business plan as it relates to external growth activities?

Mark, in terms of any potential deal here with Hilton International we just can't comment on that.

But we have always stated that one of our long-term financial strategies is to maintain an investment-grade rating.

And that strategy hasn't changed.

It is still important to us.

So there may be times or events as we have seen in the past that cause us to fall below investment grade.

But our long-term focus remains the same to be an investment-grade company.

Jeff Randall, A. G. Edwards.

On the '06 guidance I just wondered if you would comment on the tax rate assumptions used, and I know the synfuel investment is pretty minuscule, but does that contribute anything to '06 in terms of the expectations today?

No, in fact, given where oil prices are, we've taken that out of our '06 -- any benefits associated with the synfuel investment out of our '06 guidance.

But for us it is diminimus.

The benefit in 2005 was 1.5 pennies a share.

How does that, is that just an out given -- you guys paid 32 million for it back in '04.

Is that going to pay for itself at the end of the day given that '06 is looking like it is a nonstarter?

That a good question.

We did hedge our position in 2005, and taken into account the benefits of that hedge and our investment and the credits that we've received todate, we're going into '06 pretty much about on a breakeven position with our initial investment.

Okay, and then I wondered if you -- back to the union thing -- could you comment a little bit on what you saw in the third quarter at the San Francisco Hilton?

I know that was -- I think you had said in the second quarter it actually had negative RevPAR growth quarter-over-quarter based on all the group cancellations and just I guess give an update on that hotel.

It has not been pleasant.

And to me it is just kind of odd.

If you think about it what the national union is doing is contacting customers and potential groups to come and they effectively threaten them and suggest that there is going to be problems and maybe you shouldn't go there.

And I think so what happens is we have to reduce the workforce.

So I just don't how that is helping the union.

But nonetheless, that is their strategy.

Was RevPAR still negative there in the third quarter?

No.

I think for the full year we will be just a little bit off, but not that much.

And we are a big company.

There's a lot at stake; what happens a lot of times is the group says okay, we are not going to go to San Francisco, so they go to our hotel in Chicago.

I think we noted that in the third quarter San Francisco actually had double-digit RevPAR growth.

I must have missed that.

I did not as you said, the Chicago and San Francisco both turned up, but.

In the press release we mention the markets that had double-digit RevPAR growth,, San Francisco was one of those.

I think if I remember for the full year we will be off about $1 million or something.

In San Francisco.

We will have positive RevPAR growth, but off about a million, that is right.

And then on the subject of RevPAR, what is the fourth quarter -- I guess '04 RevPAR number look like on a comparable basis ex New Orleans and ex the two third-quarter asset sales?

I'm sorry, Jeff, you're asking about '04?

Are you talking about the fourth quarter '05?

I was actually talking about the fourth quarter '04 based on the look back -- what is that new year-over-year number look like now after what has happened to the portfolio and excluding New Orleans?

Why don't we do that one off-line?

Okay.

And just the last question for Matt, when you were talking about -- I'm sorry question for Bob -- when you were talking about the extra expense coverage and you said no P&L impact for expenses incurred during the third quarter.

Are you guys accruing for insurance proceeds?

And then that will just get reversed in '06?

Is that sort of how that's working?

We are not accruing for specific proceeds.

We are just able based on our insurer's assessment of reimbursables.

We are effectively recording a receivable for our operating losses in the quarter.

Jeff Donnelly, Wachovia.

Just a few questions to wrap up.

Bob, I was curious are there any steps that you guys can take or maybe intend to take to hedge your energy risk that you talked about earlier for 2006?

Yes, pick your poison.

We had a number of energy contracts, supply contracts that came off or expired earlier in 2005.

And we have been kind of waiting for energy costs to stabilize.

And they just never did.

Certainly you can do it.

You could -- we've done that in the past where we've locked in fixed contracts.

And it is something we continue to evaluate.

But for right now we have not assumed that we block in any costs.

And frankly, it is such a difficult thing to predict, Jeff, and it's hard predicting where interest rates are going to go.

It's probably easier to predict interest rates than energy costs.

So there are things that we have people working on looking at the markets.

We are hoping for some stabilization, and at that point we probably look to lock in some contracts.

Just so I am understanding you clearly concerning your business interruption insurance, how far does that coverage extend?

And how my timing of the proceeds of those moneys actually work?

It extends up to a year after the loss.

And in terms of timing of recoveries, it is just unknown.

I just don't know right now.

It's going to be in '06, throughout '06 we're just going to work with our insurance carriers to make sure that we get proceeds as soon as possible.

So they cover you basically until the end of August '06?

Yes.

I guess from a recognition standpoint should we anticipate that any money you get you will recognize as a lump sum, I guess, rather than accrued into earnings or anything?

Certainly whatever we do, we will disclose.

And I would expect that it wouldn't all come in one shot, that it would come over time.

And certainly we would disclose that in our reporting.

One last question actually concerning in the time-share area.

There has been a perception in the last few weeks that there has been growing weakness in Las Vegas, both visitation and in select circumstances even in the off-strip condominiums that are selling up there.

I was curious in your time-share business are you seeing any signs of slowing either in your sales presentation, calendar volume, unit pricing or unit volumes that would lead you to conclude there is some merit to that perception?

Absolutely not.

Our time-share business has continued to be very, very strong in all markets.

We announced that we topped off our second tower there, 423 units.

We are about 70% sold out already on our first tower.

We are starting to sell the second tower.

Demand has been very, very strong.

It is still a great market.

Will Marks, JMP Securities.

Just a quick couple of questions.

Can you confirm the amount of option expense that you are including in the '06 guidance?

In terms of dollars?

In terms of dollar amount, yes.

It is roughly about $10 million, and that is purely related to the expense associated with the unvested options.

Of course, we also have expense related to our restricted stock, which we have two years of expense (indiscernible) the grants over the last two years for restricted stock, that expense is already included in '05.

And then presumably there will be some grants in '06, and we will have some expense associated with that grant, as well.

You don't anticipate taking it up, this is accounting for that?

In other words, your guidance now does include what you fully expect for '06?

Yes, in terms of both our stock option expense and our restricted stock expense.

Great.

One other quick question on another hotel company commented on stepping up condo conversions at some of their hotel rooms.

You anticipate anything, and is any of that included in '06 numbers the 175 million of other projects, etc.?

I gather it is not.

No, it is not and that is not a business that we want to get in.

We, of course, will manage for other people that are in that business.

We're very careful and very selective who those people are.

But as far as us doing that as a second line of business, that is not something that we're focused on.

I think we have time for one more question.

Bill Crow, Raymond James.

If you stopped your asset sales after this last seven, which you have kind of hinted at, where does that put the balance of EBITDA as you look at '06 from a percentage contribution between owned, fee business and time-share?

First of all, Bill I don't think we're stopping asset sales.

I think what we said was the majority of the asset sales will have been completed, and there may be selective asset sales in 2006.

But if you do the math -- and if I remember right, the Phase I asset sales and the Palmer House on a pro forma full-year basis brought us down to roughly 50% owned.

And Phase II asset sales will bring us kind of in the I call it the high 40s, but of course a lot of that depends on how you owned assets that you currently have are producing.

So percentages could go up or down by a few hundred basis points depending on how well the New York Hilton does and the Waldorf does, Hilton Hawaiian Village etc.

But the answer is below 50% on an owned basis.

But you would still have to sell quite a few assets to get down to the 45, 45 you've talked about publicly?

Yes.

The other side to that, though, is we are doing more time-share.

So that is going to start inching up a little bit.

And Tom's business, the franchise business, is just absolutely scorching them.

Matt, do you see time-share going above 15% of EBITDA?

No.

Okay.

Thanks, guys.

Okay, thanks Bill.

Again, we want to thank everybody for joining us this morning.

And we will be talking to you down the road.

Thanks, everyone.

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

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

Have a great day.