Post-Harvey Boost Won't Last For Life Storage

Bank of America Merrill Lynch downgraded shares of Life Storage Inc (NYSE: LSI), reasoning that the post-hurricane euphoria the stock is enjoying is not a lasting tailwind and, furthermore, valuation isn't compelling.

The firm noted that Life Storage shares have outperformed its storage peers by 5 percent and the MSCIUSREIT INDEX by 11 percent since Hurricane Harvey made landfall on Aug. 31.

As such, the firm downgraded shares of Life Storage from Neutral to Underperfom but raised its price target from $73 to $77. The upward adjustment of the price target was due to the firm reducing its NAV discount from 7 percent to 5 percent, taking into account a reprieve in weaker supply hit markets post the storm.

Analysts Juan Sanabria, Jeffrey Spector and Shirley Wu estimate that the occupancy in Houston, which accounted for 10 percent of Life Storage's net operating income, rose 6 percent to 98 percent. The analysts also see modest benefits, ranging from 1 to 2 percent in select Florid markets.

See also: How Past Summer Storms Impacted Gas Prices The Following Month

Additionally, the analysts believe higher rates, though gradual, will help temporarily boost results. That said, the analysts said it is tough to make a guesstimate regarding the duration and quantum of upside.

BofA Merrill Lynch is of the view new supply deliveries could be postponed due to the storm, with resources focused on rebuilding. The rebuilding, according to the firm, may be elongated, given the tight labor markets.

However, the firm believes a temporary boost to demand could embolden developers longer term.

Citing estimates by Core Logic, which see about 80 percent of homeowner flood damage not being insured, the firm said consumption will be strained, due to higher levels of bad debt.

"Outside of the one-off and likely short term (9-12 mos) benefits from the storms, we remain bearish on storage fundamentals given elevated levels of new supply," the firm said.

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