Even after an explosive two-year bull market, Canada still boasts the highest secure yields in the world. You just have to look a little harder to find them.

One still on the bargain counter is long-time Conservative Holding and newly converted corporation Macquarie Power & Infrastructure Corp (TSX: MPT, OTC: MCQPF). The other is a new Conservative Holding addition, Extendicare REIT (TSX: EXE-U, OTC: EXETF).

Both pay monthly dividends, Macquarie P&I at a yield of roughly 8 percent, Extendicare a little over 9 percent. And those payouts are backed by strong balance sheets, as well as reliable businesses set to generate rising cash flow in the years ahead.

Extendicare has long caught my eye in the health care space as an owner and operator of long-term care facilities in the US and Canada. The company also provides subacute care and rehabilitative therapy services in the US, and home health services in Canada. US operations account for more than two-thirds of revenue, mostly ensured by Medicare. Canadian operations are regulated on both the provincial and federal level.

The basic business model is fee-based, with rates set by government authorities. Coupled with the generally steady demand for these services and facilities, that adds up to reliable revenue and cash flow over time.

And there’s considerable opportunity for further low-risk growth from adding new facilities, as well as by upgrading older ones.

Over the past year management added new centers in Alberta, Michigan and Wisconsin, boosting third-quarter revenue by CAD7.6 million. The Red Deer, Alberta, center started up in September and will add to fourth-quarter revenue.

There are currently four other projects in various stages of development in Canada. A facility in Lethbridge, Alberta, will begin adding residents this month. An Edmonton project is set to come on line in fall 2011, after weather-related construction delays. And the company will break ground on two more facilities in Ontario in spring, with completion expected by the end of 2012.

Extendicare also has multiple efforts going in the US. One is an expansion into the market for intensive short-term rehabilitation, dubbed by management Active Life Transition. The company has completed five projects totaling 112 beds last year and has USD6.1 million in ongoing development set to go in service this year. It’s also entered lease agreements to buy skilled nursing centers in Indiana and Michigan, both of which are now in operation.

Management’s ability to raise capital and deploy it economically for asset growth ensures rising cash flow going forward for Extendicare. And regulation of rates by Medicare in the US and provincial authorities in Canada give revenue something of a utility quality. That’s not likely to change, as both countries’ populations continue to grey and require more such services.

The company, however, has had a problem translating its asset growth into profits in recent quarters. The main reason has been economic weakness south of the border, which has depressed US occupancy in this country and has pushed the revenue mix to lower-margin services. The company has also been forced to increase its insurance reserves for liability cases and regulatory performance. And it’s had to deal with higher costs that come with expansion.

On the plus side, Extendicare has been effective garnering “strong reimbursement in the US” from Medicare and other programs. Government ratings in the US under the “Five Star System” have risen noticeably, thanks to an extensive quality control program.

Center renovation and new construction, combined with strategic marketing efforts that target needs of individual communities, are slowly but surely pushing the revenue mix to higher-margin services. And the company has been effective managing its exposure to a rising loonie at its US operations, utilizing natural and financial hedging while taking advantage of low-cost capital to expand.

All of these measures augur improved numbers from the third quarter of 2010, a generally seasonally weak accounting period for Extendicare. We won’t know how the company did for the full year or the fourth quarter until somewhere around Mar. 16, when numbers are announced.

But in the meantime, the payout ratio through the first nine months of the year was just 68 percent, a very comfortable level for what amounts to a government-backed business.

That support also extends to financing for growth, as the company is able to issue mortgages backed by the US Dept of Housing and Urban Development (HUD). The company now has capacity to seek USD520.6 million in additional HUD financing.

That’s extremely low-cost capital equivalent to more than two-thirds of Extendicare’s market capitalization and half its existing debt load.

Last spring, for example, the company was able to refinance two testing centers with a 35-year mortgage at a rate of just 4.6 percent. It completed another USD178 million refinancing for centers in seven US states in late 2010 and has another 19 applications pending to secure USD115 million. That settles all remaining debt maturities until 2013–and at lower rates than previously paid.

Extendicare does expect a slightly negative impact from last year’s US health care legislation as written. And federal matching of Medicaid spending by states is now slated to end June 30, 2011, which could increase risk to state payments. Litigation risk has also increased in some states, though not enough, in CFO Douglas Harris’ words, to “consider exiting a particular state.” The company in the past has pulled back from Florida and Texas on that basis.

All of these risks, however, are well compensated for by management’s conservative financial strategy. Rather, the key is the US economy, how soon and fast it rebounds to restore volumes. Not coincidentally, that’s the same problem faced by our other Portfolio healthcare play, the now-converted corporation CML Healthcare Inc (TSX: CLC, OTC: CMHIF). But at Extendicare’s current yield and price of just 35 percent of revenue, the bar of expectations is low and upside great. I’m adding it to the Conservative Holdings as a buy up to USD10.

Note that Extendicare REIT doesn’t meet the Canadian government’s definition of a real estate investment trust, as needed to avoid SIFT taxation. As a result, it’s been paying these taxes since 2007. That burden, however, has been largely neutralized by the company’s heavy reliance on US income, which doesn’t fall under the SIFT tax.

The company did reduce its distribution in December 2008 from a monthly payout of 9.25 cents Canadian to CAD0.07. That, however, was basically a prudent reaction to the slowdown in the US, a condition now reversing and setting the stage for cash flow growth. That doesn’t ensure dividend growth, but it is a necessary condition for payout increases.

Given its generally low tax bill, management saw no value in converting to a corporation. As a result, it will continue to trade under the same “-U” or “.UN” suffix it has since becoming a trust in 2005. There will also be no change to its five-letter US over-the-counter (OTC) symbol EXETF.

Macquarie P&I, on the other hand has converted. The name remains the same, except for the words “Income Fund” being replaced by “Corporation.” But the company will drop the “-U” or “.UN” suffix from its Toronto Stock Exchange (TSX) listing. As of now there’s no set five-letter OTC symbol. But from all indications it’s likely to remain MCQPF.

The owner of power assets has not earned its dividend since last year’s sale of its interest in LeisureWorld (156 percent third-quarter payout ratio). That’s mainly because management has taken its time to redeploy the funds carefully, and it looks set to change with a vengeance in 2011.

Last month Macquarie P&I raised another CAD69 million in a private placement of 9,079,250 pre-conversion trust units, boosting its cash hoard targeted for acquisitions to over CAD200 million. Some CAD140 million of this has been earmarked for the purchase of a 33 percent interest in district heating systems in Sweden, run by giant Nordic utility Fortum OYJ (Finland: FUM1V FH, OTC: FOJCY).

District heating systems are underground distribution systems delivering heat to numerous buildings and/or industrial users within urban areas from a single facility. They’re currently used by 56 percent of the Swedish population, due to a significantly lower cost than nuclear electricity, geothermal heat pumps or wood pellets. Some 60 percent of Swedes live in apartment buildings, for which district heating systems are also ideal.

The acquired assets–which will be two-thirds owned by a unit of Australia’s Macquarie Group (Australia: MQG, OTC: MCQEF)–consist of 11 regional facilities with total capacity of 786 megawatts (MW). They include biomass and oil-fired boilers, as well as steam turbines with some 4,000 supply points. They’re also carbon neutral, a major issue given tight carbon dioxide regulation in European Union countries.

From Macquarie Power & Infrastructure’s point of view, the attraction is clear: high, reliable cash flows derived from fees based on vital infrastructure. Approximately 70 percent of the business is derived from large apartment buildings, for which contracts are set annually. About 25 percent is from large industrial customers with long-term contracts expiring between 2011 and 2019. As the assets are integrated with these customers’ existing assets, renegotiation at favorable rates is virtually assured. The rest is sold as merchant electricity.

The assets are projected to produce a stable cash yield of 8 percent annually on the purchase price. Financial risk is minimized by the participation of Macquarie Group through its Macquarie European Infrastructure Fund II. The company will be able to mitigate foreign exchange exposure, thanks to the predictability of revenue and the stability of costs. In 2009, heat sales netted CAD100 million from these assets and CAD33 million in cash, of which a third should go to Macquarie P&I.

The purchase is the company’s second big one since the LeisureWorld sale, following the purchase of a 20 MW solar photovoltaic plant in Ontario slated to start up in June. That CAD130 million project will also be immediately accretive to profits and is fully contracted on favorable terms to the Ontario Power Authority for 20 years.

Given that the district heating deal won’t close until March and the solar plant has a summer start-up date, Macquarie P&I’s payout ratio is set to remain on the high side, probably for several more quarters. Management, however, has now stated that the current dividend level of 5.5 cents Canadian per month is “sustainable through 2014.”

That’s a qualification most US investors aren’t used to seeing. But Canadian Edge readers should be very familiar, as it’s exactly how Atlantic Power Corp (TSX: ATP, NYSE: AT) quantifies its dividend safety. Like Atlantic Power, Macquarie is evolving into a holding company for cash-generating assets.

And as with Atlantic Power’s current projection of 2016, 2014 is a date we’re likely to see extended in the future, as Macquarie P&I adds new projects.

Note that both Atlantic Power and Macquarie P&I  have pegged their dividends as corporations to distributable cash flow, as they did in earlier times as a stapled share and income trust, respectively.

Any attempt to judge dividend safety based on taxable earnings per share will be misleading.

Macquarie P&I shares have had quite an up-and-down ride since Macquarie Bank launched the company as an income trust back in 2004. And they’re still not back to their initial public offering price of CAD10. They have, however, come a long way from their late 2008 low of barely USD4.

And with the company now returned to its original strategy of asset growth, my bet is the old highs in the USD12 range will be bested in the not-too-distant future. Buy Macquarie Power & Infrastructure Corp up to my new target of USD9 if you don’t already own it.

For more information on Extendicare REIT and Macquarie Power & Infrastructure, 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. Macquarie P&I is the smaller at a market cap of about CAD417 million. Extendicare comes in at CAD764 million.

Both companies have broad ownership by US investors, evidenced by management’s consistent delivery of information on taxes and other matters. Some states have “blue sky” laws that may not allow your broker to pitch either or both of these to you. But the laws won’t prevent you from placing the order. 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 Exchange or OTC in the US.

Click on the trusts’ names to go directly to their websites. Extendicare is listed under Health Care, while Macquarie P&I can be found under Electric Power. 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 should be considered 100 percent qualified for US tax purposes. As of Jan. 1, 2011, Extendicare has changed its US tax status from a partnership to a corporation, putting it on par with any other foreign equity. Both provide tax information to use as backup for US filing–whether or not there are errors on your 1099–on their websites. For direct links, see the CE 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. If you hold these 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.

Extendicare’s change in US tax status to a corporation means if you hold either company in an IRA, distributions paid will be exempt from 15 percent Canadian withholding. The first exempt payment for both companies will be what’s declared in January for payment in February.