For those in search of a lofty dividend with sleep-easy safety, there are few better options than Northern Property. The REIT turned in a 13.3 percent gain in funds from operations (FFO) per unit–the best measure of REIT profitability–and a 14 percent jump in distributable income per unit (DIPU) in 2008, a year when the Canadian economy shrank and property values generally fell in most provinces. Cash flow covered debt interest by more than 3-to-1, while the payout ratio was only 71 percent.

More impressive, growth actually accelerated in the fourth quarter, with FFO surging 18.3 percent and distributable income per unit DIPU soaring 20.2 percent. That pushed the payout ratio down to just 68.3 percent, as Northern successfully integrated property acquisitions and expansion, and cut costs.

Average weighted interest costs fell to 5.13 percent from 5.39 percent a year earlier, demonstrating the REIT’s ability to access capital cheaply in a very tough environment. Vacancy rates, including renovations, stood at only 4.7 percent at end year, while “same door” revenue growth was 6.1 percent, indicating solidly rising rents. Those are healthy metrics that point to equally strong results in 2009.

Northern Property’s achievements should come as no surprise to anyone who’s followed it for any length of time. Management has consistently been able to generate double-digit FFO growth in all environments by focusing on high-quality properties in a wide range of markets, mostly in remote areas where it dominates.

Last year’s results were particularly strong, for example, in Newfoundland, the Northwest Territories and Fort McMurray, far from the major population centers of the East. The REIT’s biggest developments, meanwhile, were focused particularly on less urban areas of British Columbia and the Yukon Territory.

At present about a third of assets are located in Alberta, much in the oil patch region. But over 20 percent are in the Northwest Territories, 17 percent are in Nunavit, 15 percent or so are in British Columbia and the balance is in Newfoundland and other regions like the Yukon.

These properties convey several advantages. First, all of these areas are still growing, based on the latest statistics available (through January 2009). That includes the areas of Alberta and BC where Northern Property operates, despite the fact that overall property values there have backed off in the face of falling energy prices and diminishing activity.

Second, the REIT’s properties are in places where the major economic drivers are governments and other extremely creditworthy rent payers, and where tenants have very few other options. In fact, its largest customers are the governments of Canada, the Northwest Territories and Nunavit.

Finally, 82 percent of assets are residential properties, including retirement housing. Less than 3 percent are commercial properties in Alberta, the only region with significant energy price exposure. That leaves Northern Property’s overall revenue basically immune from a deeper energy patch slowdown. Moreover, residential property values have risen over the past year in most of its markets, providing a firm underpinning for the security of its rents. These strengths are underscored by management’s recent statements of being “pleasantly surprised” by results so far in 2009.

Ironically, the greatest risk to Northern’s profitability is utility costs, as it essentially buys energy and provides it to tenants. The REIT also doesn’t, as a matter of course, hedge energy price exposure. Consequently, a 10 percent change in heating oil prices throughout the REIT’s territory affects net earnings by roughly CD283,000, or about 1 percent. That may become a problem at some point, when energy prices recover. Importantly, however, the impact would likely be more than offset by the higher rents and occupancy the REIT would enjoy during a renewed energy patch boom.

Northern’s management states in its fourth quarter earnings release that it expects a more difficult 2009 and plans to curtail capital spending plans for a second straight year. That’s likely to hold back dividend growth, at least until the overall economy improves and the REIT no longer needs to shepherd cash flow. But a yield of nearly 10 percent and a price-to-book value of just 1.24 are plenty of incentive to buy Northern Property REIT up to my longstanding target of USD20.

As for Enerplus, back in August the oil and gas producer trust raised its monthly distribution to an all-time high of CAD0.47 per unit. Since then, it’s made three cuts, to the current rate of CAD0.18, the same level it paid in March 1999 when oil was in the low-teens. Meanwhile, its share price has fallen to its lowest level since November 2000.

Enerplus shares did rebound slightly following the late February announcement of strong fourth quarter 2008 earnings. But they quickly gave up those gains and more in the first few days of March, as investors again focused on falling energy prices and their potential impact on trust distributions.

At the current dividend level of CAD0.18, Enerplus’ payout ratio is only about 29 percent of fourth quarter distributable cash flow. That leaves a healthy cushion with which to cover projected 2009 capital expenditures of CAD300 million, a 48 percent decline from 2008 outlays. Moreover, a third of Enerplus’ expected capital expenditure (CAPEX) budget is projected to be deployed before the winter thaw, giving the trust plenty of time to decide whether to spend the rest or cut back further if market conditions warrant.

Cash flow, of course, will decline further this year, as lower CAPEX likely translates into at least somewhat lower output. Management currently projects an average output rate of 91,000 barrels of oil equivalent per day and an exit rate for the year of around 88,000. Operating costs are also expected to rise marginally, both from lower production and higher utility costs in a still-tight power market. That will be offset to some degree by trust-wide cost cutting and the likelihood of lower drilling costs, as rig rates decline amid a glut of available equipment.

Cash flow will likely be hit harder by a drop in realized selling prices below the fourth quarter levels of CAD55.16 per barrel for oil and CAD6.92 per thousand cubic feet for natural gas. The shortfall would be magnified by a further drop in energy prices, possibly putting pressure on both the distribution and the current level of CAPEX.

Even this, however, would hardly be a knockout punch for Enerplus, which alone among trusts did weather the massive energy price declines of the late 1990s and remained profitable throughout. Debt-to-annualized cash flow, for example, is only 0.5, one of the lowest in the industry and far below that of non-trust producers. That’s a burden that could be handled easily even if cash flow does fall a great deal more than expected.

Enerplus also boasts some of the highest-quality, most diversified reserves of any trust, boosting proved reserves overall by 10 percent last year, leaving its proved reserve life index at a solid 9.4 years. The trust’s play in the Baaken shale region is proving particularly lucrative, even as last year’s acquisition of Focus Energy Trust has helped drive down finding, development and acquisition (FD&A) costs. And Kirby, the trust’s oil sands play, increased its reserve count by 70 percent last year.

Even under the most pessimistic assumptions, the net present value per share of Enerplus’ conventional energy assets alone is CAD27.66, nearly twice the trust’s current market price. And that’s not including oil sands assets valued at CAD1.70 per share and rising.

All told, it would likely take a drop in oil to USD10 or lower before Enerplus’ profitability would be in serious question. But by that time, the vast majority of available energy globally would be uneconomic, making the massive supply destruction we’ve seen in recent months seem rather paltry by comparison. That’s some pretty strong insurance that Enerplus will survive this downturn, which in turn is the best possible assurance the shares will be in the lead when energy prices do eventually turn higher.

How high would Enerplus’ shares go in a recovery? When the shares last peaked at nearly USD60 in September 2006, it was a much smaller and, arguably, a far less valuable company. Since then, it’s acquired the extensive natural gas assets of Focus Energy, for which management negotiated a price of little more than book value when gas was scraping 2007 lows not far from today’s levels. The Baaken development wasn’t even in the picture then, and neither were its oil sands assets.

The trust has cut its debt load to a level at which it can survive even a much greater plunge in energy prices. Debt is only about 15 percent of equity. Debt overall was greatly reduced with the CAD500 million proceeds from the sale of the trust’s interest in the Joslyn oil sands project, for which the price was negotiated when oil was at a much higher price than it is now.

For much of its history Enerplus sold at sizeable multiples to book value. Today, its trust units trade at just 70 percent of book. Just a return to book value or lowest-case net asset value would trigger a near double in the shares. A return to last year’s high price would mean a triple, in addition to the yield, which is still nearly 12 percent despite the recent cuts. And if the trust can clear up its post-2010 taxation uncertainty, the gains would almost certainly be much greater still.

The bottom line is Enerplus is about as bullish a situation as you’re going to come across in the battered energy patch. To be sure, we’ve suffered with it in recent months. And as long as this downturn continues, it’s going to take patience and a tolerance for pain to hold it. But with survival assured and all the pieces in place to cash in on an energy recovery, Enerplus Resources is a strong buy up to USD20 for those willing to take that on.

As a REIT, Northern Property Trust won’t be subject to trust taxation beginning in 2011. Enerplus Resources will be, though management states in its fourth quarter and full-year 2008 earnings release that “we believe our asset base is well suited to an income-oriented business model.”

The trust further states it will “likely convert to a dividend paying corporation” and that “with the current forward commodity price and our plans regarding production, costs and capital spending, we do not expect a significant change to our overall tax costs until 2013, even if we were to convert to a corporation during 2010.”

The upshot: What Enerplus will pay out in distributions in 2011 and beyond will depend far more on what happens to energy prices than its tax rate. Note that Enerplus also derives income from operations in the US, which are wholly exempt from the tax.

Both trusts’ dividends are considered qualified for tax purposes in the US. Tax information to use as backup for filing them as qualified–whether or not there are errors on your 1099–is included in the Income Trust Tax Guide.

As is customary for virtually all foreign-based companies, the host government–in this case Canada–withholds 15 percent of distributions paid to US investors at the border. This tax can be recovered by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation, though unrecovered amounts can be carried forward to future years.

For more information on Enerplus and Northern Property, visit How They Rate. Click on the “.UN” symbol to go to the Web site of our Canadian partner MPL Communications for press releases, charts and other data. These are substantial companies, so any broker should be able to buy them, either with their Toronto or US symbols. Ask which way is cheapest. Click on the trusts’ names to go directly to their Web sites.