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PALM BEACH, FL-An earnings update Innkeepers USA Trust released this week added fuel to the fire to a recent UBS Warburg report that expects the real estate investment trust to founder a little while longer amid diminished demand for hotel rooms in the major U.S. metropolitan markets.

The Palm Beach-based REIT reported Aug. 7 a 7.4% decrease in revenue per available room and an 8.1% decrease in room occupancy for the second quarter ended June 30.

Much of that decrease is attributed to the company’s performance in markets such as the Silicon Valley region in California, Seattle, Dallas and Boston, Keith Mills, a UBS Warburg hospitality industry analyst, writes in a recent market report.

For instance, Innkeepers USA generates from 25% to 30% of its lease revenue from extended-stay hotels in the Silicon Valley market, the largest percentage of any of the hospitality companies covered by the New York-based investment banking and securities firm.

“Last year, hotels in California’s Silicon Valley market were on top of the world,” Mills writes. “This year, they are feeling the heat, as demand growth has plummeted, primarily due to fewer hotel stays from the technology industry. After speaking with our contacts in this market, we believe that July RevPAR growth in Silicon Valley could decline by approximately 20% to 25%. Furthermore, our contacts are expecting August RevPAR growth to be down–in the mid-teens or (even) higher.”

That doesn’t bode well for Innkeepers in the current third quarter, which is reporting second-quarter decreases in funds from operations, net income and total revenue. The REIT reported FFO of $20.6 million, or 44 cents per FFO share, for the three months ended June 30, compared with FFO of $23.8 million, or 51 cents per FFO share, for the same period a year ago.

Second-quarter net income losses increased to $989,000, or 10 cents per diluted share, on total revenue of $18.96 million, compared with a net loss of $181,000, or eight cents per diluted share, on total revenue of $19.8 million for the same period in 2000.

The company considers its poor earnings performance for the year as nothing more than a short-term reaction to a national economy that is poised for rebound.

“While the exact timing of an economic rebound is uncertain, we believe we are well-positioned to resume RevPAR growth as business travel recovers,” Jeffrey H. Fisher, Innkeepers’ president and chief executive officer, says in a prepared statement. “On a long-term basis, we remain quite positive, buoyed by our bi-coastal property strategy and our portfolio of high-quality assets in markets with historically strong demand drivers and high barriers to entry.”

That rebound may be farther off than Fisher or others in the hospitality industry would like, though.

“Because the booking patterns for advance reservations have shortened significantly during 2001, our contacts are finding it increasingly difficult to forecast and budget revenue beyond one month,” Mills noted in his recent report. “Having said that, based on advance bookings and current market conditions, our contacts are not optimistic about business heading into the fall months.”

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