By any measure, that’s a phenomenal turnaround from the dark days of late 2008 and early 2009. Unfortunately, it’s a rally that’s at least partly standing on highly uncertain ground: a three-month surge in oil prices from USD40 to nearly USD70 a barrel, which in turn has carried the Canadian dollar up from around 76 cents US to over 92 cents.

As I point out in the Feature, I’m still very much a long-term bull on energy. The price of oil, and even more so natural gas, remains well below reserve replacement cost and even production costs from many unconventional sources. The surest evidence of that is the continued contraction of the number of drilling rigs in use in North America and the generally sorry state of the energy services business.

On the other hand, oil’s recent surge is due to the fact it was dramatically oversold earlier this year and because investor expectations for the global economy have improved. At this point, black gold is no longer oversold by any stretch, and, as recent market action makes pretty clear, expectations for the global economy are fickle in nature. They can, and literally do, change with the latest statistical release.

Eventually, my expectation is still that oil and natural gas prices will take out last summer’s highs and then some. That in turn will catapult the loonie well past parity with the US dollar, giving Canadian trusts and high-yielding corporations a double push to new highs as well.

That, however, isn’t going to happen all at once. Despite the “green shoots” we’ve pointed out in the Great White North, sooner or later, the torrid rally of the last three months must run out of gas. And at that point we’re going to see some of our recent gains evaporate, despite the fact that everything remains deeply undervalued.

What isn’t so ephemeral is the fact that first quarter numbers for CE Portfolio picks again affirm that their underlying businesses are still weathering this recession, now the worst in many decades. And as long as that’s the case, their ultimate full recovery is assured.

No doubt we’re still headed for some real ups and downs with share prices. And if oil prices should come down hard, the fallout on Canada will be fast and furious, as well as compounded by a sharp retreat in the Canadian dollar. That’s the pattern we saw for several months following the fall of Lehman Brothers last September, and nothing has happened since to suggest it can’t happen again.

But again, as long as our picks’ businesses are making it, their shares will eventually move well beyond where they are now. And that’s what we’re continuing to play for.

Our primary task at Canadian Edge remains to keep tabs on those underlying businesses, and to ensure you’re in the best of them. Not only is that the best path to recovery and the surest guarantor of dividend safety. But it’s also how we’re going to ensure we’re ready for what’s next for the economy and markets, which is now likely to be much more inflation.

Mainly, good businesses grow dividends in good times. Meanwhile, the Canadian dollar provides a natural inflation hedge for the value of our holdings and their dividends, as it rises and falls with oil prices, and no inflation is possible without higher oil.

Fund Switch

Last month, I pointed out weakness in first quarter numbers at Consumers Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) and Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF). At the same time, I downgraded both to holds in the Portfolio, pending further developments.

The good news this month is both have reported some encouraging news. Consumers Waterheater’s core waterheater rental business had a solid first quarter, with fee increases and cost controls generally offsetting a 0.9 percent attrition rate that was in line with prior quarters.

The trust was also able to issue CAD330 million in new debt at reasonable rate to refinance the bridge loan taken out for the purchase of submetering operation Stratacon. Slightly higher interest rates will be offset by rental increases over time.

Instead, the trust’s main trouble was at the Stratacon operation itself, which took a cash flow loss of CAD1.2 million. The shortfall was due to actions taken by management in response to a negative decision by Ontario regulators on March 24, which stipulated that installing “smart meters” in residential complexes is “not currently authorized under the Electricity Act, other than condominiums,” and is therefore “prohibited.”

The decision excludes about half of Stratacon’s business, which is focused on condominiums and activities outside of Ontario. Consumers, for example, is the No. 2 sub-metering provider in Alberta. It has, however, forced the company to change the way it does business with the other 50 percent of Stratacon, which is basically apartment buildings in Ontario. And it’s put the brakes to growth at least temporarily as well.

From my point of view as well as that of Consumers’ management, the government decision is somewhat incongruous, given its stated goal of conserving energy and the fact that sub-metered buildings can post substantial energy savings. The problem is they are the law, and Consumers has no option but to negotiate to reach a settlement that will allow them to keep Stratacon in business.

On the bright side, management actions taken after the decision appear to have steeled the trust against further delays and setbacks. And management has stated that it has the flexibility to sustain its current distribution until a deal is reached, in part by paring back costs.

Management’s goal, described in its most recent conference call, is to resolve the matter by June 30, at which time it would be able to better clarify the state of Stratacon’s current contracts in Ontario as its ability to grow its market-leading position in the province. The latest in case is that the Ontario Energy Board is conducting a “written proceeding” to determine if the company and rivals can carry out “discretionary activities” in sub-metering. That’s an indication it is considering Consumers’ petition, a clear step in the right direction.

The outcome is still highly uncertain here, which is why Consumers shares remain weak–the fund is by far the worst performing CE Portfolio recommendation this year. On the other hand, that also means the expectations bar is set very low, and even a mildly favorable outcome could provide a big boost to these bombed-out shares.

A dividend cut, of course, can’t be ruled out under a particularly harsh decision, or if management’s plans to compensate for a setback fall short. For one thing, 2011 trust taxation is fast approaching. Unexpectedly transforming Stratacon from a profit center to a source of losses would put a major dent in Consumers’ stated plans to out-earn its future obligations and maintain its current distribution level.

The 20 percent yield is arguably already pricing a worst case in. But until there’s some resolution here, Consumers Waterheater Income Fund remains a hold.

As for Yellow Pages, its troubles stemmed from acquisitions made of specialty publications in real estate and automobiles to fire up growth, also for the purpose of out-earning its 2011 tax burden. Last month’s dividend cut was basically recognition that it could no longer count on these publications in a weak economy to provide needed earnings. And management elected to shepherd more cash flow to cut debt instead.

Since then, not much has been released from Yellow in the way of quantifiable numbers. The company, however, continues to do a fair amount of talking on Bay Street about its prospects and plans. The most important of these involve its Yellowpages.ca offering, the fast-growing online portion of its business that now comprises 16.6 percent of overall revenue after growing at a 29 percent rate in the first quarter. Management expects this business to take a quantum leap forward in coming quarters, particularly as more Canadians plug into wireless data services.

That’s encouraging. But the next key date for Yellow is going to be in mid-August, when the company releases its second quarter numbers and management updates its multi-year guidance–particularly as regards 2011 taxation. The current distribution rate appears to take 2011 into account as well as a forecast for little or no overall directory information business growth at least through 2010.

That should augur well for the strength of the current distribution rate. So does the fact that expected cash flow savings from last month’s dividend cut would theoretically enable Yellow to pay off all maturing fixed income obligations through 2012 without accessing the capital markets.

The trust is also cheap, selling for just 51 percent of book value, 1.67 times sales and a yield of well over 14 percent. That low bar earns Yellow Pages Income Fund a hold, but not a buy until we see more business developments.

As for the other 30 trusts and high-yielding corporations in the Portfolio, each posted first quarter earnings demonstrating the strength of its underlying businesses under the worst possible conditions. That continues to earn all of them buy recommendations.

I am, however, making a change to my recommended mutual fund alternatives. I’m selling Sentry Select 50 S-1 Income Trust, which is slated to be absorbed this month into the open-end Sentry Select Canadian Income Fund. The units have now been delisted from the Toronto Stock Exchange in preparation for absorption, which is slated to officially take place on June 12.

The new fund is the product of the merger of Select 50 and three other closed-end funds managed by Sentry Select Capital. The new open-end fund will start with roughly CAD500 million in assets, giving it greater scale than any of the closed-ends on their own. And as an open-end fund, investors will be able to redeem their shares for cash on demand and at net asset value (NAV).

The decision by Sentry to merge and convert four of its open-end funds has already had one beneficial impact for investors on both sides of the border: the evaporation of the discount to NAV that at times had ranged well over 20 percent. That’s also an upcoming benefit to another How They Rate-listed closed-end, Sentry Select Diversified Income Trust (TSX: SDT-U, OTC: SSDUF), which is also up for shareholder vote to become an open-end fund.

Thanks to the closing of the discount gap and more favorable markets, Select 50 units have risen roughly 40 percent this year, with all of the gain and then some coming since early March. All of the costs of the exchange are being borne by the manager.

For information, brokers and investors can contact directly by calling 1-888-730-4623, faxing 416-364-1197 or emailing info@sentryselect.com. There should no Canadian withholding on the transaction as it does not involve dividend income. Dividends will be paid monthly as before at a rate of CAD0.775.

Over the time we’ve held Select 50, I’ve come to appreciate the solid management of the Sentry team. On the other hand, this is now an open-end fund that’s not registered in the US, which will almost surely complicate matters with at least some brokerages. Most important, there are better alternatives for those who want to invest in Canada through mutual funds.

As a result, I now recommend you sell your shares in the new Sentry fund and buy returning CE Portfolio member EnerVest Diversified Income Trust (TSX: EIT-U, OTC: ENDTF). EnerVest has gone through several changes since I last held it in the Portfolio. The most important is a series of strategic initiatives first announced in early February and passed by shareholders in late March.

In stark contrast to prior management policy of perpetually expanding the asset base–regardless of the discount between the market price of shares and NAV–the new arrangement provides a voluntary annual cash redemption privilege. It also amends portfolio restrictions, allowing management to take advantage of other opportunities to increase current yield and adapt to pending 2011 trust taxation. Finally, it mandated a 1-for-3 reverse stock split, pushing up the price of EnerVest shares to give it greater visibility to institutions.

The result of these actions has already had the impact of narrowing EnerVest’s discount to NAV to around 9.9 percent, down from highs of as much as 30 percent in late 2008. This discount should narrow further going forward as confidence in the fund and Canadian markets returns, providing an upward kick in EnerVest’s share price that the open-end Sentry fund it’s replacing can’t match.

The narrowing of the NAV discount and the rise in the Canadian dollar are major reasons why EnerVest has returned nearly 60 percent year-to-date in 2009. But management has also been astute about picking trusts with solid underlying businesses paying big dividends, and then waiting for the market to reward the fund with higher valuations.

As of the end of May, the Portfolio held roughly 20 percent of its overall assets in the volatile oil and gas sector. But its holdings were only the strongest trusts and larger oils, the least cyclical fare. Meanwhile, more than twice that amount of investment was in decidedly non-cyclical fare such as preferred stocks, bonds and basic infrastructure, such as utilities. And there was no leverage of the portfolio, another sharp departure from prior years. CE Portfolio holdings are well represented.

Management’s strategic moves this year did also involve a distribution reduction, which was effective with the March payment. The current rate, however, appears to be covered solely with distributions paid by individual holdings, again a stark contrast with the far more aggressive management policy of prior years.

In short, this is not the same EnerVest that I unloaded from the Portfolio some months back. And despite the recovery in its shares this year, there appears to be plenty of upside ahead. That’s ability to profit from a continued recovery in the Canadian markets as well as to reap a high dividend stream and capture gains from a further narrowing of the discount to NAV. And the fund’s new strategy should keep distributions high well past 2011 as well.

Again, my preference lies with buying a basket of first rate individual Canadian trusts and high dividend paying corporations. But if mutual funds are your game, EnerVest Diversified Income Trust is a solid buy up to my new target of USD12.

And Now, Numbers

As I mentioned last month, first quarter 2009 was one of the most challenging ever for Canadian businesses. Not only did growth contract, it did so for the fourth consecutive quarter in some very important regions, namely Ontario.

Meanwhile, with oil and gas prices at a fraction of year earlier levels, the energy business went into shutdown mode, sending western provinces’ economies reeling. The collapse of two of the big three US auto companies was the coup de grace for sectors in eastern Canada with connections to them, from metals refining to shipping.

To be sure, not every trust in the How They Rate universe has been able to keep its head above water during this crisis. The Dividend Watch List highlights 16 of the most challenged–trusts that have had to completely eliminate distributions in recent months–and only a few of them appear to be holding up as businesses now.

The increasingly dire straits of the weak, however, only serve to highlight just how truly remarkable is the continued strong performance of CE Portfolio picks. In last month’s issue, I highlighted the first quarter numbers of 15 of them. This month, I feature the other 16, as well as now-sold and soon to convert Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV), which is reviewed in the Dividend Watch List.

Artis REIT (TSX: AX-U, OTC: ARESF) and Innergex Power Income Fund (TSX: IEF-U, OTC: INGRF) are the June High Yield of the Month selections. Oil and gas producers ARC Energy Trust (TSX: AET-U, OTC: AETUF), Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF), Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF), Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF), Provident Energy Trust (TSX: PVE-U, NYSE: PVX) and Vermilion Energy Trust (TSX: VET-U, OTC: VETMF) are explored in the Feature, along with prospects for the rest of that sector.

Below, I look at the remaining eight trusts and high-yielding corporations to report numbers since the May issue went to post. Note that all have also been reviewed previously in the weekly Maple Leaf Memo and or last month’s Flash Alert as well. Finally, Energy Savings Income Fund has a new name: Just Energy Income Fund (TSX: JE-U, OTC: JUSTF).

Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF) posted a 74 percent payout ratio, based on distributable cash flow. The project portfolio had availability of 95.3 percent for the quarter, up from 92 percent a year earlier, a testament to management’s ability to juggle the risks of its varied asset base to stabilize cash flow.

Those who endeavor to read Atlantic’s financial statements invariably find a complex picture, largely due to the variety of hedging that takes place on many fronts. The underlying business objective, however, is quite simple: to maximize stable cash flows to fund distributions for holders of Atlantic’s income participating securities.

Equally easy to understand are the primary streams of revenue that make that possible, i.e. long-term contracts inked almost entirely with investment-grade electric utilities. Utilities have never defaulted on such contracts and, given their strong performance during this recession, aren’t in any danger of doing so.

Improved utilization was achieved despite the continued outage of the Onandaga plant, which is in the process of being converted to biomass. Biomass promises to be a growing focus for Atlantic after the acquisition of 30 percent of developer Rollcast for CAD3 million, which the company financed entirely with cash on hand. Chief uncertainties for 2009 are a rate case involving the company’s Path 15 power line, for which it has reached an all-party settlement that must be ratified by the Federal Energy Regulatory Commission.

There’s also the question of allowances for carbon dioxide (CO₂) emissions at the company’s Chambers plant, though that appears also headed for favorable resolution given the growing clarity on the shape of federal carbon regulation legislation. In fact, the company has a real opportunity in the Southeast from CO₂ regulation by virtue of its biomass investment, one of the few ways power companies in the region have to meet likely federal renewable energy mandates.

To be sure, Atlantic is basically a bet on management being able to continue dealing with risk effectively. Given the company’s record during this recession, however, there’s a lot of reason for confidence. Atlantic Power Corp is still a buy up to USD10 for those who don’t already own it.

Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF) is raising its monthly distribution to CAD0.15 per unit beginning with the July 20 payment, up from a prior rate of CAD0.1209. That’s really about all investors need to know about the health of its underlying business under what are horrific conditions for others.

The numbers behind that boost, however, are just as compelling reading. Revenue rose just 2.7 percent as the slump in the economy slowed new projects, particularly in the energy patch. Project backlog, however, remained strong at CAD982.8 million, only slightly below the record CAD1.1047 billion recorded at the end of last quarter. That’s a sure sign that Bird is getting its share of what business there is now, mainly government and stimulus-inspired projects.

Meanwhile, income before tax surged 26 percent, as margins widened on projects in backlog. Earnings per share surged to CAD0.98 from CAD0.66 a year ago and thrashed Bay Street estimates of CAD0.78. Management is quite clear that it expects a tough environment to continue in 2009. Even after the dividend increase, however, the payout ratio is only 46 percent of adjusted earnings. And as a construction firm, Bird carries huge cash rather than debt balances.

Bird shares have moved a long way since we added them to the Portfolio back in December. But they’re still well off the all-time highs in the low 40s last touched in summer 2008. After the dividend increase, Bird Construction Income Fund is now a buy up to USD30 for those who don’t already own it.

Canadian Apartment Properties REIT’s (TSX: CAR-U, OTC: CDPYF) first quarter 2009 results read pretty much as they have quarter after quarter since we added it to the Portfolio in September 2007, just as the North American recession and US financial crisis were getting under way.

Revenue rose a steady 5.2 percent on a combination of conservative acquisitions and rent growth. Net operating income ticked ahead by 3.4 percent, paced by a thirteenth consecutive quarter of rising same property net operating income. Distributable income rose 2.5 percent, 1.9 percent on a per-share basis.

Debt and interest coverage ratios improved to 2.07 from 1.98 a year earlier and, despite the economic slowdown, rents on lease turnovers rose by 2.3 percent. Overall portfolio occupancy fell to 97.3 percent from 98.3 percent a year earlier. A good chunk of that, however, was due to the REIT’s focus on upgrades and maintaining high credit quality in a weak market, including basically kicking out a number of unreliable tenants that had slipped in during an acquisition. As a result, earnings should be even more recession resistant should the downturn last a while longer.

The first quarter is traditionally a weak one for the REIT, as it incurs higher energy costs for its tenants as well as other mostly seasonal expenses. The payout ratio of 107.8 percent was, however, an improvement on last year’s 109 percent. And including contributions to the dividend reinvestment plan, the payout was only 94.6 percent. In addition, 95 percent of all mortgages in the portfolio are federally insured, meaning they’re lower cost and only 7 percent of the portfolio is in Alberta, limiting the risk of a possible prolonged energy patch slump.

In all, Canadian Apartment is the picture of a steady REIT that’s keeping its direction through difficult times. The REIT is one of five Portfolio picks still down for the year, presumably due to expectations that it’s somehow vulnerable to recessions. That makes now a good time to buy Canadian Apartment Properties REIT up to USD15 if you haven’t already.

Chemtrade Logistics Income Fund’s (TSX: CHE-U, OTC: CGIFF) basic business of producing and selling specialty chemicals to heavy industry is without doubt sensitive to economic ups and downs. The key to the trust holding its distribution this year is how bad things ultimately get for its industrial customers and how good a job management has done shielding finances from the storm.

First quarter 2009 was a low point for two major reasons. Demand was sharply lower across all of the trust’s product lines, as were selling prices. Meanwhile, the extended outage of the company’s Beaumont, Texas facility pushed up costs. Overall, distributable cash flow fell nearly in half to CAD0.31 a unit from last year’s level of CAD0.53, and the payout ratio rose to 97 percent. That’s a negative should it develop into a trend, and the 16 percent-plus yield and share price of barely book value well reflect that risk.

On the other hand, as management has pointed out, the Beaumont plant is now back on line, which should shave roughly CAD0.19 per unit in quarterly costs going forward. Then there’s the fact that most capital spending for this year has been done, which will further free up cash flow even if there is no bounce back of demand.

Ultimately, a full recovery in cash flow to levels of prior quarters will depend on commodity prices rising enough to encourage customers like Vale Inco to boost their own output. That in turn will depend greatly on the global economy. For its part, however, the company is well-positioned to ride out the remainder of this recession, and even maintain its current distribution barring a further sharp global economic decline.

That makes Chemtrade Logistics Income Fund a solid buy for more aggressive investors from their current low level up to USD7.

Great Lakes Hydro Income Fund (TSX: GLH-U, OTC: GLHIF), like most power trusts, basically sells its output to government entities and large utilities, by far the most creditworthy customers around. That’s an extremely solid underpinning in troubled times like these, and the company’s strong first quarter 2009 results reflect that.

Revenue and income from operations rose 13 and 10 percent, respectively, as the company enjoyed built-in rate increases for an overall 13.2 percent boost in levies. Hydro power output was down 7 percent from year-earlier tallies on less favorable water conditions at its dams. But even that was more than made up for by increased output from the trust’s newly acquired wind farm. The farm plus a 50 percent interest in a hydro plant were purchased in February and have already added CAD3.8 million in income before non-cash items.

The focus at Great Lakes is, as always, on the long-term, and management expects the new wind facility to be a major asset in fulfilling its pledge to hold its distribution steady in 2011, when trust taxation kicks in. Strong finances and backing by 51 percent owner Brookfield Asset Management (TSX: BAM/A, NYSE: BAM) ensure the trust will have the wherewithal and exposure to make other acquisitions as well, which will be increasingly profitable given the growing emphasis on both sides of the border on carbon neutral electricity production.

In addition, management now believes it will essentially be able to zero out all taxes into 2014 with accrued non-cash expenses. In sum, Great Lakes Hydro Income Fund is an extraordinarily steady investment and a buy up to USD15 for even the most conservative.

Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) is the new name for Energy Savings Income Fund, which is very much the same earnings powerhouse that continues to grow rapidly despite a difficult environment in both the US and Canada.

Gross customer additions ran 57 percent ahead of year-ago levels in the company’s fiscal fourth quarter (ended March 31). That was the major factor behind a 9 percent jump in sales, which, combined with cost controls, pushed up distributable cash flow after marketing expenses by 16 percent.

The overall payout ratio of just 56 percent was a marked decline from last year’s 61 percent in the seasonally strong period, auguring well for cash flow going forward into the next fiscal year. Gross margin growth for the fiscal year rose 16 percent, a vast improvement from management guidance of 5 to 10 percent earlier this year as the company well outperformed even the targets Bay Street once found overly optimistic.

Looking ahead, the company will face the challenge of integrating the major acquisition of Universal Energy Group (TSX: UEG, OTC: UEEGF) and dealing with the continued economic slump in North America. Importantly, Just Energy is exposed to bad debt expense in just 26 percent of its markets and has held it there to just 2.6 percent of revenue, despite the sharp economic deceleration. Moreover, first quarter 700 percent growth in the trust’s green energy programs in the most recent quarter points up an area that is likely to provide some serious upside to cash flow in the next fiscal year.

Finally, management once again affirmed during its conference call that it intends to maintain its payout for, in Executive Chair Rebecca McDonald’s words, “Flaherty’s tax,” by holding off on dividend increases and instead paying “special distributions” each year before 2011. That’s another affirmation for the 11 percent-plus yield long term. Buy Just Energy Income Fund up to USD11.

Newalta (TSX: NAL, OTC: NWLTF) took a double hit in the first quarter from weakness in the energy patch–still its largest area of operations–and slumping waste recycling activities in the industrial east as well.

First quarter revenue slid 25 percent, pushing down cash flow 65 percent. Net margin fell 57 percent in what was without doubt the company’s worst quarter since the recession began. The Western Division accounted for some 69 percent of the decline, with a steep decline in lead and oil prices chiefly to blame. The Eastern Division also saw its sales drop 17 percent, while net margin tumbled 74 percent largely due to the drop in lead recycling profits.

If there is good news from these numbers, it’s that they were largely expected by the market as well as management. Despite garnering noticeably less cash, the company has no liquidity problems, actually paying off debt and fully funding maintenance capital spending with cash flow during the quarter. The company also appears to be holding market share in its traditional businesses, while adding new customers in its oil sands cleanup operations.

One reason for the corporation’s stability is, of course, the large cut in its distribution it made earlier this year when it converted. Even after the big first quarter decline, for example, cash flow less maintenance capital expenditures still covered the remaining dividend by a factor of more than 2-to-1. That actually left a lot of room for growth capital expenditures, which, amazingly, were nearly three times maintenance costs. It’s these growth expenditures that have been the mainstay of the Newalta franchise since inception, and they’re the main reason I’ve continued to hold the shares in the CE Aggressive Portfolio, despite what may appear to be terminal weakness.

The fact that management is still keeping its eye on expanding market share in such as poor market is why I’m maintaining my buy recommendation on Newalta for aggressive investors up to USD5.

Make no mistake: Newalta isn’t going anywhere until the North American economy finally turns the corner. All of its operations are highly cyclical, and it’s quite possible its up-to-now indomitable management will have to pull in its horns if the economy does enter another accelerating downturn. Barring that, however, this one has proven its ability to weather even the most difficult of environments. And from a share price of just 39 percent of book value and 35 percent of sales, there’s a lot of room for upside.

Northern Property REIT’s (TSX: NPR-U, OTC: NPRUF) first quarter results came in pretty much as solid as expected. Revenue rose by 11.6 percent, as the REIT successfully integrated new properties and enjoyed the benefit of rising rents. Funds from operations rose to CAD0.54 a unit from CAD0.47 last year and distributable income per share rose 15.6 percent to CAD0.532.

The REIT’s payout ratio fell to 69.6 percent from 80.5 percent, a solid achievement in a quarter traditionally marked by higher costs, particularly for energy. Behind those numbers was weakness in some areas, notably Fort McMurray, Alberta, where a sharp slowdown in oil sands projects pushed up apartment vacancy rates to 4.2 percent from just 1.4 percent three months earlier. And it’s likely there will be further slowing there for the rest of the year, with rising vacancies pushing down cash flow.

On the other hand, Northern’s diversity across far-flung markets and reliance on government tenants is also paying off, as overall vacancies and rents across the portfolios remain steady despite the sharp economic decline in the western provinces of late. Management has also been able to keep its modest roster of acquisitions and expansions on track, including a seniors’ housing project in Newfoundland.

As for financing costs, the REIT was actually able to cut the overall interest rate on its mortgage portfolio to 5.02 percent from 5.13 percent in the fourth quarter of 2008. That’s remarkable given the tough credit market conditions, particularly in commercial real estate, and it’s a testament to sound financial management and good relationships with Northern’s lenders as well.

When I added this REIT to the CE Portfolio in late 2006, one of the chief attractions was management’s track record navigating tough environments for real estate. What’s followed since has been mostly good times for property, and the REIT has responded with strong results and, up until this crisis at least, more than a few dividend increases.

Now it’s showing the other side of its appeal: Conservative operating and financial policies forged in the crucible of tough times that are paying off in steady returns for investors. The shares, of course, have been far from immune from the crisis and are still selling well below their early 2008 high of USD24. They’re also still at 1.46 times book value, a valuation laughably below some very shaky US real estate investment trusts, just as the very safe 8 percent yield is far above payouts on much riskier counterparts south of the border.

The upshot is Northern Property REIT remains a solid bargain for even the most conservative investors up to USD20. Note that unlike US REITs, Canadian REITs’ dividends are considered qualified for tax purposes.