Our bullish view on CQR is based on expectations of steady earnings growth and asset revaluations, a defensive rent base, its healthy balance sheet and reasonable valuation.

CQR's 1H14 like-for-like net operating income (NOI) showed modest growth of 2.5%, despite a tough retail environment. This came on the back of 3.3% rent growth from specialty stores and a 3.6% increase in sales from anchor tenants, Woolworths and Wesfarmers.

CQR was able to achieve this growth because occupancy costs for its specialty stores are among the lowest in the industry, increasing those stores' ability to absorb rent increases.

Acquisitions and asset redevelopments contributed to a 16% lift in the value of the Australian portfolio in 1H14.

Notably, the company is considering six future projects in the next two years at a cost of approximately $94.6 million. Upon these projects' completion, we'd anticipate further asset valuation upside from the domestic portfolio.

The balance sheet was in reasonable shape, with a gearing ratio of 31.6% at the end of December 2013. This was unchanged from June 2013 and comfortably inside management's 25% – 35% target range.

Moreover, debt refinancing risk has been mitigated with the average maturity of CQR's debt extended to 3.6 years in 1H14 (compared to 2.8 years six months earlier).

The stock is looking good on three key valuation metrics, as the following chart highlights. Its P/E is around 12.7x (purple line), compared to a 15x average of its closest peers); the distribution yield is 7.3% (yellow line), compared to a 6% average of its closest peers; and its net tangible asset per share (grey line) has recently turned higher after years of declines.

Source: Bloomberg

Amidst the challenging retail environment, CQR benefits from the defensive nature of its rent base – Woolworths and Wesfarmers comprised 53% of CQR's base rent.

As the following graph illustrates, national food expenditure is outpacing spending on discretionary categories like department stores, clothing, and household goods. CQR's focus on non-discretionary retail allows for further steady NOI growth in our opinion.

Source: CQR 1H14 Presentation

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