Citi Maintaining Neutral On Sunstone Hotel Investors (SHO)

Citi Investment Research is maintaining a Neutral rating and a $11 price target on shares of Sunstone Hotel Investors SHO. In a note to investors, Citi writes, "SHO provided preliminary 1Q REVPAR growth, announced an acquisition, disposition, renovation project and intentions to issue PFD stock in the near-term. Our initial read is neutral. Expectations for SHO are low. Our views: (1) Fundamentals appear in-line with our estimates, likely below the Street, but accelerated in March, which is a positive; (2) Acquisition of Hilton San Diego Bayfront seems reasonable on a cash flow basis, but may not be at a substantial discount to construction cost for this relatively new asset; (3) Sale of Royal Palm development project makes sense and is a positive. SHO is providing substantial seller financing, a negative, but it is a secured, short duration, first mortgage, at a reasonable rate, that is current cash pay; (4) SHO intends to issue PFD stock to replenish its cash ahead of Doubletree Times Square refinancing (~$70-$90m pay-down) and renovation. Better than common equity at current prices, but we would like to see leverage and coverage ratios improve; (5) Consolidating mgmt of two NYC hotels is logical, but unclear how much the associated renovation will cost, or how disruptive it may be to earnings. The SHO story remains in transition. Balance sheet leverage needs to be reduced and mgmt needs to reestablish themselves. At ~15/13x 2011/12E EBITDA, shares trade roughly in-line with the group of Lodging REITs. Not a compelling relative value, given company specific issues. Maintain our Hold/model portfolio underweight." Share of SHO gained 5 cents yesterday to close at $10.21.