In the August 2014 In Focus feature we discussed 10 buy-rated companies in the How They Rate coverage universe, many of which have attributes befitting Portfolio Holdings.

In fact we explicitly referred to Dream Industrial REIT (TSX: DIR-U, OTC: DREUF), in the subhead introducing it in that article, as “The Next REIT” in line for promotion to the Conservative Holdings.

Although we weren’t as explicit in our discussion of Baytex Energy Corp (TSX: BTE, NYSE: BTE) and its potential for inclusion in the Aggressive Holdings, the company’s production-per-share growth profile, its solid and growing asset base, management’s record of execution and an exceptionally attractive yield make it at least the fifth-strongest Oil and Gas recommendation in the coverage universe.

We noted in last month’s Portfolio Update our concern regarding Conservative Holding Dream Office REIT (TSX: D-U, OTC: DRETF), particularly its unit-price performance relative to other Canadian real estate investment trusts (REIT).

Market weakness relative to other REIT is likely the result of a soft Canadian office market.

Canadian credit rating agency DBRS recently noted that while occupancy levels remain healthy across each real estate subsector, in the mid- to high 90 percent, the office segment has experienced a slight decline due to decreased tenant demand and a general increase in sublet space.

Dream Office is outperforming the broader office market in Canada, and it continues to put up solid financial and operating numbers. But we have better alternatives, including its affiliate Dream Industrial REIT, which is exposed to the more favorable industrial market.

The Canadian industrial market continued to operate under relatively healthy fundamentals during the first quarter of 2014, with a lower national availability rate, higher net asking rental rate and positive net absorption.

According to CBRE, the overall national availability rate was at 5.6 percent, a 20 basis point quarter-over-quarter improvement. The average net asking rental rate was CAD6.01 per square foot, just shy of the record high of CAD6.02 per square foot recorded in the third quarter of 2013. The market also recorded 5.1 million square feet of positive net absorption during the first quarter, well above the 10-year quarterly average of 3.6 million square feet.

Of the major industrial markets, Edmonton experienced the most significant rise in rental rates, with a record high of CAD10.83 per square foot in the first quarter, accompanied by the lowest availability rate in Canada at 3.9 percent and 1.4 million square feet of positive net absorption.

These were primarily the result of higher demand from the transportation and warehousing sectors in the region.

There are currently approximately 13.4 million square feet of construction in progress. Most of the construction is in the Greater Toronto Area (43.7 percent of total square footage under construction), which was driven by increasing demand for distribution centers from retailers.

Demand for industrial space should remain strong, and rental rates should continue to increase moderately as the Canadian manufacturing sector expands and retailers continue to invest in their distribution networks. REITs with industrial exposure should benefit from strengthening fundamentals.

That’s the long case for Dream Industrial, which was spun off via an initial public offering (IPO) from what was then Dundee REIT and what’s now Dream Office REIT in October 2012.

Dream Industrial reported adjusted funds from operations (AFFO) per unit of CAD0.199, up 1 percent sequentially and 6.4 percent year over year. The AFFO payout ratio improved to 88.6 percent from 96.6 percent for the prior corresponding period.

Over 700,000 square feet of new leasing and renewals commenced in the quarter at rates 11 percent higher than rates on expired leases, and commitments have been obtained for 1 million square feet of new leasing and renewals commencing in the remainder of 2014 compared to 1.2 million square feet of expirations.

Management should be able to realize solid rent growth, with estimated market rents exceeding in-place rents by approximately 5.1 percent.

Occupancy was 95.6 percent as of June 30, 2014, compared to 96.3 percent as of March 31, 2014, and 95.7 percent as of Dec. 31, 2013. Occupancy the end of the second quarter included 245,000 square feet of commitments on vacant space.

Leverage remained stable at 52.4 percent, with interest coverage of 3.0 times and a weighted average term to maturity on debt of 4.1 years.

Shortly after reporting second-quarter earnings Dream Industrial announced agreements with KingSett Capital and Dream Office to acquire two separate portfolios totaling 1.35 million square feet of industrial properties (the “Portfolios”) for approximately CAD128 million.

The acquisitions will be funded by issuing approximately 2.7 million units of equity to an affiliate of KingSett and approximately 2.3 million units of equity to Dream Office, in each case at a price of CAD9.40 per unit, with the balance funded by new and assumed mortgage debt.

The KingSett portfolio consists of 1.1 million square feet of single and multi-tenant light industrial properties in Calgary, the Greater Toronto Area and Montreal, with a total purchase price of CAD94.7 million. The portfolio is 97.7 percent occupied with a weighted average lease term of 7.0 years.

The Dream Office portfolio consists of 248,000 square feet of multi-tenant flex industrial properties in Edmonton that were intended to be transferred to Dream Industrial at the time of its IPO. The purchase price is CAD33 million.

The properties are 95.1 percent occupied with a weighted average lease term of 3.1 years.

Dream Industrial management expects the acquisitions to be immediately accretive to AFFO to the tune of CAD0.015 per unit on an annualized basis.

Following the closing of these acquisitions Dream Industrial’s portfolio will be 95.7 percent occupied with a weighted average lease term of 4.7 years and an in-place rent of CAD7.02 per square foot.

Rents will be, on average, 4.4 percent below estimated market rents, providing ample room for growth.

Dream Industrial REIT, which is yielding 7.2 percent at current levels, is a buy under USD11.

The February 2014 acquisition of Aurora Oil & Gas Ltd for CAD2.8 billion, its biggest-ever acquisition, expanded heavy-crude producer Baytex Energy’s US shale portfolio to include output from the Eagle Ford Shale formation in Texas, one of the most prolific plays in North America.

The Eagle Ford deal boosted Baytex’s production of higher-priced light oil. And it provides exposure to Gulf Coast crude oil markets via established transportation systems.

Management recently opted to sell North Dakota Bakken assets for CAD357 million, shifting capital to its promising Eagle Ford assets.

With a yield north of 6 percent and three promising core plays–including Peace River and Lloydminster in addition to the Eagle Ford–Baytex is a solid growth-plus-income option for energy investors.

We’re adding it to the CE Portfolio Aggressive Holdings as a de facto replacement for hold-rated Lightstream Resources Ltd (TSX: LTS, OTC: LSTMF), which faces continuing pressure to maintain its dividend in the face of asset sales and softer crude oil prices.

During the second quarter Baytex produced 66,934 barrels of oil equivalent per day (boe/d), up 12 percent sequentially and 15 percent year-over-year, at 87 percent oil and natural gas liquids.

Funds from operations were CAD202.5 million, or CAD1.49 per share, up 19 percent compared to the first quarter and 30 percent compared to the second quarter of 2013.

Operating netback–which is the sales price less royalties, production and operating expenses and transportation expenses–was CAD40.74 per barrel of oil equivalent boe, an 11 percent sequential increase and a 28 percent year-over-year increase.

And management also announced a 9 percent dividend increase to a monthly rate of CAD0.24 per share.

Baytex has sold off along with the slide in crude oil prices since late June, providing a compelling opportunity for investors with a long-term focus. Baytex Energy is a buy under USD46 for production and dividend growth.

For more information on Dream Industrial REIT, go to How They Rate under Real Estate Trusts. Click here to go to the REIT’s website.

Click here to go to Dream Industrial’s Yahoo! Finance page for its Toronto Stock Exchange (TSX) symbol and here for its US over-the-counter (OTC) listing. Yahoo! Finance does not yet have a “Key Statistics” page for Dream Industrial.

For more information on Baytex Energy, go to How They Rate under Oil and Gas. Click here to go to the company website.

Click here to go to Baytex’s Yahoo! Finance page for its TSX symbol and here for its New York Stock Exchange (NYSE) listing. Both links include a wealth of information and data, and both include links to Yahoo! Finance’s “Key Statistics” page.

Both Dream Industrial and Baytex have ample liquidity on both sides of the border, both in TSX and US-listed symbols. Dream Industrial trades on the TSX under the symbol DIR-U and on the US OTC market under the symbol DREUF. Baytex trades on the TSX and the NYSE under the symbol BTE.

Dream Industrial is covered by eight Bay Street and Wall Street analysts, all of whom rate the REIT a “buy.”

The average 12-month price target among the eight analysts who provide such a figure is CAD10.36, with a high of CAD11 and a low of CAD10.

The implied 12-month total return based on the average target, a current annualized distribution rate of CAD0.70 and a Sept. 4, 2014, closing price on the TSX of CAD9.72 is 13.8 percent.

Baytex is covered by 22 analysts, 18 of whom rate it a “buy.” There are three “hold” ratings and one “sell” rating on the company. .

The average 12-month price target among the 19 analysts who provide such a figure is CAD53.08, with a high of CAD60 and a low of CAD48.

Baytex closed at CAD46.66 on Sept. 4, on the TSX. Including a current annualized dividend rate of CAD2.64 per share, Baytex would post a total return of 19.4 percent based on analysts’ consensus forecast.

As is the case with all stocks in the Canadian Edge coverage universe, you get the same ownership whether you buy in the US or Canada. These stocks are priced in and pay dividends in Canadian dollars. Appreciation in the loonie will raise dividends as well as the value of your shares.

Dividends paid by Baytex are 100 percent qualified for US income tax purposes. Its dividends are taxed at the now-permanent Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

Canadian investors enjoy favorable tax status for Baytex. For US investors, dividends paid into IRAs aren’t subject to 15 percent Canadian withholding tax, though they are withheld at a 15 percent rate if held outside of an IRA.

Dividend taxes withheld from US non-IRA accounts can be recovered as a credit by filing a Form 1116 with your US income taxes. The amount of recovery allowed per year depends on your own tax situation.

As for Dream Industrial REIT, the vast majority of Canadian income trusts converted into corporations in 2011, as a result of the Canadian government’s decision to close the loophole that eliminated taxation at the corporate level.

With the notable exception of REITs, most other entities that opted to maintain an income trust structure would be classified as Specified Investment Flow-Through entities (SIFT) and would be taxed at the corporate level.

Distributions from a SIFT held in an IRA aren’t subject to the 15 percent withholding tax by the Canadian government. That’s because SIFTs essentially have tax parity with corporations, and therefore their distributions are considered dividends under Canadian tax law.

Distributions from REITs, by contrast, will be withheld at the 15 percent rate when US investors hold them in their IRAs or other tax-advantaged accounts.

Unfortunately, the exemption from Canada’s withholding tax of 15 percent on dividends/distributions from holdings in US investors’ tax-advantaged accounts, such as IRAs and Roth IRAs, only applies to corporations, not REITs.