Why It Might Be Time to Start Checking Out of Hotel Stocks

Hotel industry experts are slashing guidance and offering up some worrisome predictions for the lodging industry over the next two years. And if their projections play out, investors might want to start checking out of hotel stocks sooner - rather than later.

Lodging stocks have been on a tear over the past two months, with hotel real estate investment trusts generating total returns, including dividends, of 5.7% in June and 10.2% in July. Year-to-date, they're up 15.4%, outpacing the S&P 500's 6.7% return and Nasdaq's 4.4% return.

But experts warn that the surge in global terrorist attacks, fears about the Zika virus, weak corporate earnings growth and other factors could trigger a sharp pullback in hotel bookings this year. And this, they say, could cause the sector's stellar fundamentals to unravel - and even turn negative - over the next two years.

A report, released this week from Fitch Ratings, appears to back up this doom-and-gloom scenario: it's predicting hotel occupancy will fall in 2016. And if historic trends are any indication, this would mean the industry's RevPAR(revenue per available room) - which measures room rate and occupancy growth - will slow significantly in 2017 and turn negative in 2018.

"Occupancy is usually the first thing to go, and then rates follow suit six to 12 months after that," said Stephen Boyd, a senior director of real estate and leisure at Fitch Ratings.

The last time RevPAR flipped negative was at the height of the recession in 2009, when it plunged 16.6%.

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