Ten percent-plus yields with reasonable risks and robust growth potential are what July’s High Yield of the Month recommendations–Artis REIT (TSX: AX-U, OTC: ARESF) and Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–have in common. Both are strong bargains and this month’s best buys.

Since 2004, Artis has built a portfolio of 108 commercial retail (30.6 percent of leasable area), industrial (42 percent) and office (27.4 percent) properties across western Canada. Alberta remains the key base of operations with a little less than half of total property. But in recent years, management has rounded things out with investment in Manitoba, Saskatchewan, and British Columbia. The result is the REIT’s fortunes are still tied to the energy patch, but to a lesser extent than in its earlier years.

The REIT demonstrated its strength throughout the downturn of the past couple years by continuing to boost cash flow with higher rents and high occupancy, even while adding properties and holding down debt to just 45.4 percent of the portfolio’s gross book value. And it’s even better positioned to profit from the building regional economic recovery, as well as weather any potential relapse.

Last month management closed the CAD64 million purchase of a three-building Vancouver office complex and announced its first foray into the US, buying a 100 percent occupied office building whose major tenants are the medical technology and bioscience industry. It also stated the REIT has another CAD100 million in acquisitions under conditional agreement, all of which are set to be accretive to cash flow when they close later this year.

Encouragingly, Artis also continues to be successful raising low cost capital to fund this expansion. In late June, the company executed an equity offering initially targeted at CAD70 million that eventually raised CAD80.6 million. As a result, it’s essentially eliminating any refinancing risk until 2013.

All that adds up to superior cash flow coverage for the REIT’s distribution of nearly 10 percent and holds open the possibility of an increase as business conditions continue to improve. Artis units have come a long way from their late 2008 low but are still nearly 40 percent off their late 2007 highs as well. As a REIT, Artis has no 2011 taxation risk.

Now is a great time to buy Artis REIT up to my target of USD12 if you haven’t already.

In contrast to Artis, Provident has gone through a major transformation over the past several years. It started with the spinoff of substantially all of its US oil and gas production and midstream energy assets into BreitBurn Energy Partners LP (NSDQ: BBEP) and the subsequent sale of its limited partner and general partner interests to Quicksilver Resources (NYSE: KWK).

It concluded this month with the spinoff of the company’s remaining oil and gas production assets and their subsequent combination with Midnight Oil & Gas to form Pace Oil & Gas Ltd (TSX: PCE, OTC: MDOEF).

The Pace spinoff hands Provident unitholders 0.12225 shares of Pace per share of Provident held, a value of roughly USD0.98 per share based on recent prices. Shares will be distributed on Jul. 13, 2010.

Pace’s current production is about 13,000 barrels of oil equivalent per day, and it holds expansive long-life development opportunities in the Deep Basin. This asset mix, likely to be attractive to potential acquirers, features some 334,000 acres of undeveloped land in the region.

By far the most attractive piece from the spinoff, however, is the remaining Provident Energy, which is the second-largest natural gas liquids-focused energy midstream company in Canada. The company already operates a full range of extraction, gathering, transportation, storage and fractionation facilities. These are mostly in western Canada. But thanks to a string of recent purchases, they now stretch to Sarnia, Ontario and Lynchburg, Virginia.

Assets are complemented by marketing and logistics expertise, which mirror their geographic reach. Meanwhile, a commercial services division provides storage, blending and terminalling services to oil sands producers and processors, giving the company the ability to profit from the resurgent growth in that region. As part of the spinoff, management has liquidated its hedge position, leaving only a minimal of debt and little refinancing risk other than a convertible bond maturing Apr. 30, 2011.

As part of the terms of the Pace merger, Provident also received CAD120 million in cash, which is being used to pay down debt. That puts the company in good position to hit the ground running with a base of increasingly profitable natural gas liquids (NGL) assets and financial flexibility for further acquisitions.

At just 1.37 times book value and 92 percent of sales, Provident is one of the cheapest midstream energy companies in North America as well. The current distribution is well covered by cash flow and management has affirmed its safety at least through 2010. Buy Provident Energy Trust up to USD8.

As for Pace Oil & Gas, my advice is to hold onto the shares for now, which I’ll begin tracking in How They Rate this month. Given that many Provident unitholders are in it just for the dividends, we’re likely to see some selling of Pace as this deal works through.

But selling for just 50 percent of book value and a steep discount to net asset value, any losses are likely to be short-lived. That means at worst a better chance to cash out. Note that I won’t be adding Pace to the Aggressive Portfolio, owing to the large number of yield-paying energy producers already there.

What can go wrong at Artis and Provident? In Artis’ case, the major risk is the downturn for office rents in the Alberta market, which is due in large part to recent heavy building. The REIT dodged the worst of the downturn largely because the bulk of its leases coming up for renewal were at well below-market rents. That’s thanks to conservative financial practices and high portfolio quality as well as to buying properties at good prices. But an even deeper downturn could force it to begin renewing at lower rates than those on existing leases.

Pace’s profits, like those of every producer, move in lockstep with oil and gas prices. In Provident’s case, the chief vulnerability is to a sharp drop in NGL prices. NGLs have been particularly strong because they’re alternatives to crude oil, which has been much higher-priced than natural gas. Much of the attraction of Marcellus Shale development in the US is because the gas is rich in liquids. But a change in those economics could make NGLs much less attractive and dry up demand for the company’s infrastructure.

The good news is neither risk is likely to have much of a bite. For one thing, Artis’ lease renewals are staggered, meaning only a small percentage come up in any given year. And as first-quarter earnings numbers attest, it’s already had considerable success dealing with this year’s expirations.

Moreover, the REIT continues to diversify outside the markets most hit by over-supply, with Alberta now less than half the overall portfolio.

Diversification was a major reason for the deal announced last month to buy a Minneapolis-St. Paul suburban office building, as well as the acquisition of an office complex in British Columbia closed in May.

And the energy patch economy is rebounding now, tightening up regional property markets.

A growing portion of Provident’s cash flow, meanwhile, comes from fee-based assets, such as the Corunna, Ontario, storage facility purchased last spring.

As a result, a rising portion of cash flows isn’t vulnerable to shifts in energy prices, or even in activity. Price risk management further protects midstream margins.

There’s still the question of what Provident management will do with the company’s dividend on Jan. 1, 2011, when it will likely convert it to a corporation.

The shift to a purely midstream operation does make cash flow more predictable, a key reason why management has elected to maintain the current CAD0.06 per share monthly rate at least until conversion. And midstream assets by nature offer numerous opportunities to shelter cash flow from taxes. But until we see a couple quarters of results after the spinoff, the future dividend rate will remain an open question.

Interestingly, the Toronto Stock Exchange listing of Provident already reflects the Pace spinoff in its price, trading at a lower level than the New York Stock Exchange listing which doesn’t as of this writing. That puts the yield of the TSX listing at 11 percent-plus, versus 9.8 percent for the NYSE listing.

My view since this deal was first announced has been that Provident’s post-spinoff price will reflect expectations for its yield. Based on Pace’s current TSX price, the value of the spinoff is roughly USD0.98 per Provident share, which accounts for the lower TSX price versus the NYSE listing. As long as Provident holds its current yield, however, its share price should rise back to the pre-spinoff level, even without the divested oil and gas assets. In fact, it’s likely to go well past that level if the company shows it can maintain the payout past conversion.

In any case, there doesn’t appear to be much if any risk remaining in the share price relating to either the spinoff or a prospective conversion to a corporation. Mainly, Provident’s yield is now several percentage points higher than those of other “Energy Infrastructure” companies tracked in How They Rate.

One risk both investments face is potentially higher taxes on dividends in the US next year. Congress still hasn’t passed the president’s budget for 2011, and particularly the provision to extend a preferential rate on dividend taxes with a cap at 20 percent. Barring that, investors who own Artis and Provident outside an IRA will probably see their tax rates rise next year, as they will for all dividend-paying equities. Canadians dominate ownership of Artis, which means a higher rate won’t create meaningful selling. Provident’s much higher US ownership makes it potentially more vulnerable, though dividend safety concerns will weigh far more heavily.

For more information on Artis and Provident Energy see How They Rate. Click on the TSX symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts. These are substantial companies that trade frequently in both the US and Canada. Artis is smaller at a market cap of CAD624 million, but Provident still has CAD1.7 billion even after the Pace Energy spinoff/merger.

Some states have “blue sky” laws that may not allow your broker to pitch Artis to you. Those laws, however, don’t prevent you from placing the order. If your broker won’t take the trade, take your business somewhere else. A discount house like E*Trade will charge you a whole lot less for trading with them as well. US investors are generally not permitted to take part in secondary offerings, but that has nothing to do with shares that are already traded either on the Toronto Stock Exchange or over the counter (OTC) in the US. Provident trades NYSE and has options as well, so even the least competent brokerage should be able to fill your order.

Click on the trusts’ names to go directly to their websites. Artis is listed under Real Estate Trusts, while Provident Energy is tracked under Oil and Gas. I may move Provident to Energy Infrastructure in coming months, however, to reflect its changed business mix. Click on their US symbols to see all previous writeups in Canadian Edge and its weekly companion Maple Leaf Memo.

Distributions paid by both companies are considered 100 percent qualified for US tax purposes. Both provide tax information to use as backup for US filing–whether or not there are errors on your 1099–on their websites. Tax information to use as backup for US filing–whether or not there are errors on your 1099–is available 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. If you hold these trusts outside an IRA, the 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 generally be carried forward to future years. Form 1116 recovery will also be possible after these trusts convert to corporations.

If held in IRAs, both trusts’ distributions will be exempt from Canadian withholding once they convert to corporations. That won’t happen until Jan. 1, 2011 for Cineplex and until late 2010 at the earliest for Just Energy.

At that point, however, the effective yield for both will rise 17.6 percent for US IRA investors, as both have pledged to convert without cutting dividends. For more information on IRAs and withholding, see recent Canadian Currents articles in the CE archives.