Bank of America Securities has turned more bullish on hotel real estate investment trusts (REITs), lifting price targets for several companies in the sector after third-quarter industry data showed stronger-than-expected demand.
The bank's optimism follows a 7.3% year-over-year increase in US revenue per available room (RevPAR) for the third quarter. RevPAR is a key metric in the hotel industry that combines occupancy and average daily room rates, giving a snapshot of how well hotels are filling rooms and what they're charging.
Bank of America also raised its fourth-quarter RevPAR growth forecast to a range of 4% to 5%, up from its previous outlook. The revision suggests the bank expects the travel rebound to continue into the final months of the year, even as some other parts of the economy show signs of cooling.
Why hotel REITs are in focus
Hotel REITs are companies that own and operate hotels, and they distribute most of their taxable income to shareholders as dividends. Unlike traditional office or residential REITs, hotel REITs are more sensitive to short-term economic swings because room rates and occupancy can change quickly with travel demand.
The third-quarter RevPAR growth points to resilient consumer spending on travel, a trend that has held up despite higher interest rates and lingering inflation concerns. Business travel, which had been slower to recover after the pandemic, appears to be contributing as well.
Bank of America's price target increases are a signal that the bank sees further upside in hotel REIT stocks, which have been under pressure in recent years due to worries about a potential recession and high borrowing costs. The new targets suggest the bank believes the sector's earnings momentum is strong enough to support higher valuations.
What this means for investors
For everyday investors, the news is a positive indicator for the travel and hospitality sector. Hotel REITs can offer attractive dividend yields, but they also carry more risk than other types of REITs because their income is tied to the cyclical travel industry.
If the fourth quarter delivers growth in the 4% to 5% range, that would mark a slowdown from the third quarter's 7.3% pace, but still a healthy level. It suggests that while the boom may be moderating, demand is not collapsing.
Investors should note that price target changes are just one analyst's view and not a guarantee of future performance. Still, when a major bank like Bank of America raises targets across a sector, it often reflects a broader reassessment of the industry's prospects.
The travel theme has been a bright spot in recent earnings reports. For example, American Express lifted its 2026 profit outlook as airline spending jumped 13%, and ITC Hotels' 51% profit surge signaled that India's travel boom remains intact. These data points, along with the hotel RevPAR figures, paint a picture of a global travel industry that is still expanding.
Risks to watch
While the outlook is positive, there are risks. A slowdown in the broader economy could quickly dampen travel demand, and higher interest rates increase borrowing costs for REITs, which often carry significant debt to finance their properties.
Additionally, the fourth-quarter forecast is just that—a forecast. Actual results could come in lower if consumer spending weakens or if there is a resurgence of COVID-19 or other disruptions.
Investors who are considering hotel REITs should look at the fundamentals of individual companies, including their geographic focus, property quality, and balance sheet strength. Diversification across different types of REITs can also help manage risk.
In the meantime, the Bank of America move is a vote of confidence in the hotel sector's near-term prospects. For those already holding hotel REITs, the raised targets may provide some reassurance. For others, it's a reminder that travel remains one of the more resilient consumer spending categories.
