If COF could quickly sell a couple of buildings to lower their gearing, this would be a solid buy around $1.50.
But they've been caught out being overgeared at the low point of the interest rate - and therefore cap rate - cycles.
Ordinarily, gearing of 35% per se shouldn't present too many problems. A heavy economic downturn however could cause havoc with valuations should cap rates blow out by a couple of percent due to a combination of high unemployment, higher 10 year bond yields and sticky inflation. This is even before considering potential issues with the banking system.
In a 'likely' worst case scenario (actually impossible to determine), a weakening from 5.5% to 7.5% across the portfolio, assuming no change in net rental income, doesn't sound like much, but would in fact hammer the NTA to around half what it is presently. This is because cap rates apply to gross property values, not net property values. Take away total debt, and the fall in COF's unit price begins to make sense. Seemingly modest gearing can kill book value when cap rates come off of record lows.
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