Hilton Hotels Corp. (HLT) Wednesday reported a 39 percent rise in quarterly earnings as major urban hotels filled near capacity, giving the company leverage to raise room rates.

Investors were disappointed Hilton did not offer a stronger forecast, especially since rival hoteliers reported robust results, indicating an upturn in industry fortunes.

Shares fell nearly 2 percent in midday trade.

A lack of convention business at its Chicago hotels cut the room revenue growth rate, a key measure of health in the lodging industry, by 2.3 percentage points.

Beverly Hills, Calif.-based Hilton said profit rose to $75 million, or 19 cents per share, from $54 million, or 14 cents per share, a year earlier.

Tax-related items added a penny per share to earnings, leaving adjusted profit in line with the analysts' consensus view of 18 cents, according to a poll by Reuters Estimates.

Revenue rose 6 percent to $1.1 billion from $976 million, and comparable revenue per available room rose 8.3 percent, partly reflecting the slow travel economy a year earlier around the Iraq war.

Hilton, best known for its high-end flagship hotels, also owns the Hampton Inn (search) and Embassy Suites (search) chains.

"Many investors were expecting a bit more," said Fulcrum Global Partners analyst Joe Greff. He added that Hilton's properties did better than expected but interest expense was somewhat higher than he predicted and Hilton did not bump up the forecast much.

Hilton now expects full-year earnings per share in the middle to the high end of the range of 50 cents to 59 cents. In April, it forecast profit in the low to mid 50-cent range, and analysts, on average, expected 56 cents.

Hilton's results came after Marriott International Inc. (MAR) and Starwood Hotels & Resorts Worldwide Inc. (HOT) posted strong quarters and said business travelers and groups -- the slowest portion of the lodging market to react to economic upticks -- were back on the road after three slow years.

Co-Chairman and Chief Executive Stephen Bollenbach in a statement signaled rising room rates would drive profits forward, with rooms becoming scarce in cities like New York and Boston.

Top destinations had almost 90 percent occupancy and "a return to true pricing power is nearing," he said, adding "The summer started out great."

The company also raised its 2004 revenue outlook to about $4.17 billion from $4.16 billion.

It said it sees comparable revenue per room increasing between 6 percent and 8 percent for 2004, up from the April growth forecast of 5 percent to 7 percent.

Hilton develops, owns, manages or franchises about 2,100 hotels, resorts and vacation ownership properties. Its other chains include Doubletree and Homewood Suites.

Hilton shares were off 33 cents at $17.71 in New York Stock Exchange (search) trade.