Both trusts are down slightly from where I added them to the Portfolio. That, however, is largely a function of when I added them–Canadian Apartment in September 2007 and Just Energy (then named Energy Savings Income Fund) in July 2007–given the strong headwinds the markets have faced since.

In contrast, as businesses both have continued to perform well, actually growing operations despite the worst economic and credit environment in decades. As reported last issue, Canadian Apartment posted solid first quarter results, as revenue rose 5.2 percent, net operating income increased 3.4 percent and distributable income moved higher by 2.5 percent.

The balance sheet got stronger as debt interest rose to 2.07 from 1.98 in 2008. In addition, some 95 percent of the mortgages that back the REIT’s properties are federally insured, enabling management to consistently refinance them at a cost lower than conventional mortgages. Rents rose 2.3 percent and occupancy, though down slightly, was still enviable at 97.3 percent, with a good chunk of the vacancies due to the REIT’s policy of kicking out unreliable tenants.

Looking ahead, the REIT has several major strengths that will continue to keep it solid during the ongoing recession. One is a relentless focus on property and tenant quality, evidenced by its ability to raise rents and avoid hefty bad debt expense. All of the properties are considered “high quality,” a prerequisite for everything the REIT does and has done in recent years.

Another is regional diversification, tempered by a concentration on Canada’s most stable markets. Energy dependent Alberta, for example, contributes only 7 percent of net operating income, while far more stable Ontario is 69 percent. The overall property mix is, therefore, not tied to any particular demographic. Nor is it leveraged to new development, as the REIT’s primary expansion has occurred through acquisitions.

The solid balance sheet, access to low-cost funding, a wide knowledge of Canadian markets and reliable cash flow are all critical strengths for such successful growth. And while tight credit markets and the weak economy have kept growth plans on the conservative side, management is certainly poised and prepared to tack them up a notch or two. Opportunities include the growing demand for upscale senior housing and accommodating wealthy immigrants who continue to come to the country, many from emerging Asia to British Columbia, where the REIT has recently expanded.

The increase in portfolio-wide vacancies over the past year is a clear sign Canadian Apartment is by no means immune from economic ups and downs. Weakness has been most pronounced in areas of most recent expansion, such as British Columbia and Alberta. Management’s prior forecast of stabilized rents in those provinces has proven optimistic, as competitors have dropped rents and forced the REIT to come down as well.

In addition, there’s been some slippage in the eastern provinces such as Ontario, which has also seen rising costs such as for increased recycling standards and energy. And while high-end apartment rents have generally held steady, lower-end unit rents have been falling. Again, that doesn’t directly affect this REIT, as it focuses on the high end. But it does indicate overall market weakness that could wind up affecting the entire market.

A deepening of Canada’s recession could well worsen these trends and cut more deeply into cash flow. Fortunately, things will have to get a lot worse to really threaten the payout, which was covered even in the traditionally weak winter quarter when energy costs can bite hard into apartment REIT profits.

The REIT has also been able to offset some of the overall economy’s weakness by effectively controlling debt and operating costs, such as energy. That effort could be ramped up in coming months, if Ontario regulators act to establish rules allowing a resumption of smart metering growth.

If there is a drawback to owning Canadian Apartment Properties it’s management’s exceptionally conservative approach to its distribution, which hasn’t been increased since November 2003. But at well over 8 percent and safe, it’s far superior to anything on this side of the border. And it’s treated as a qualified dividend in the US as well, a further advantage over its counterparts here, which mostly pay out in ordinary income.

Buy Canadian Apartment Properties REIT for steady, high income and some growth up to USD15.

Just Energy Income Fund also came in with superior numbers for the quarter ended March 31, its fourth for fiscal year 2009. As reported in the June Canadian Edge, sales rose 9 percent and distributable cash flow after marketing expenses surged 16 percent. Despite some of the worst conditions in memory, the company boosted its customer additions by 57 percent over fiscal 2008 levels. That marked a sharp acceleration from the fiscal third quarter (ended Dec. 31, 2008) rate of 19 percent, in part due to a 700 percent explosion in sales of “green” energy programs for electricity alone.

Gross margins–the best measure of how profitable the customer base is–rose 16 percent. That bested management’s target of 5 to 10 percent. Meanwhile, bad debt was just 2.6 percent of revenue, in part because only 26 percent of sales are exposed to that risk.

Aggressive and effective marketing are the main part of Just Energy’s success. That promises to take another leap forward with the acquisition of Universal Energy Group (TSX: UEG, OTC: UEEGF). That deal was approved overwhelmingly by shareholders of both companies in late June and is set to close imminently following court approval.

Universal’s core business, like Just Energy’s, is selling natural gas and electricity directly to residential and small- to medium-sized commercial and industrial customers in Canada and the US. Universal also sells long-term water heater rental programs in Ontario and operates an ethanol manufacturing facility in Saskatchewan.

At this point, management has stated it’s in no great hurry to sell the ethanol plant, but will do so at the “first opportunity.” It does, however, plan to use Universal’s presence in tankless and high-efficiency water heaters to augment its growing lineup of “Green Energy Option” products. These are not only extremely popular, but they often generate higher profit margins and enable the trust’s offerings to stand out as well.

As management has explained to me on several occasions, one of the benchmarks for evaluating Just Energy’s success is its ability to maintain and increase a highly effective sales force. This it’s been clearly able to do, in part because the weak economy has increased the pool of available talent. And its power will be enhanced again with the buyout of Universal, which brings 14 more US operating licenses along with greater Canadian market reach and staff.

The merger has been financed by exchanging 0.58 new Just Energy units for each share of Universal. The cost and skepticism about its accretive nature is one reason Just Energy units have languished since it was first announced. But the discount isn’t likely to last much past the announcement of fiscal first quarter 2010 earnings (end June 30), given Universal’s internal growth, which hit 280 percent for operating income. And that was before customer replacement in its most recent quarter, and without the greater scale advantage provided by joining with Just Energy.

The trust has also been successful because it’s been able to hedge out the various factors beyond its control, such as volatile energy prices, economic weakness and swings in exchange rates and interest rates. Focusing on the little guy generally means less customer turnover, even in times of economic weakness. The trust relies little on debt (14 percent of assets) and it’s only real use of credit is to make acquisitions.

Commodity prices swings are typically factored out by locking in purchases of energy at set prices that match new sales contracts, also at set prices. Even competition figures to be less of a factor going forward, as the financial sector meltdown literally ran many of the commercial supply retailers out of business, particularly in the US.

That does leave some currency risk, as there are considerable operations in the US (currently about 30 percent of revenue). But even here exposure is hedged by the fact that costs are also in US dollars, which holds margins steady. And growth in the US has consistently been robust enough to more than offset a drop in the value of receivables to the parent. In any case, the Universal acquisition will further weight operations back to Canada at least initially.

Just Energy shares have come well off the lows hit in late 2008, mainly because the trust has continued to surprise on the upside as a business. That uptrend should resume again as we approach Aug. 7, the projected date for fiscal first quarter 2010 earnings to be announced.

In the meantime, Just Energy yields nearly 12 percent. And that doesn’t include the annual “special distribution” management uses to zero out potential tax liability and as it “keeps its powder dry for Mr. Flaherty’s tax.” Price-to-sales of just 60 percent is also absurdly low for a growing company.

The bottom line: Now is a superb time to pick up shares of Just Energy Income Fund at or below USD11 if you haven’t already. Note that if you previously owned Energy Savings Income Fund, your shares have been swapped 1-for-1 with no tax liability, withholding or any other event.

For more information on Canadian Apartment Properties REIT and Just Energy Income Fund, visit How They Rate. Click on the “.UN” symbol to go to the website 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 the US over-the-counter (OTC) symbols. Ask which way is cheapest. Click on the trusts’ names to go directly to their websites.

On Taxes

Note that 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– can be accessed via the Income Trust Tax Guide under the heading “Links to US Tax Statements.”

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.

As a REIT, Canadian Apartment Properties won’t be subject to trust taxation that kicks in Jan. 1, 2011.

Just Energy plans to convert to a corporation. But management states “our goal and our planning and budgeting believe that we will be able to grow through the tax issue and maintain our distribution–our dividend in a very similar level that we are now as distributions.”

Obviously, making good on that pledge will depend on the strength of operations. But given what we’ve seen to date, and particularly through this economic meltdown, the prognosis is good.