Both companies’ names begin with the letter “N.” Beyond that superficial similarity, however, lies a key common factor for this month’s Best Buys: Energy and industrial waste recovery specialist Newalta Corp (TSX: NAL, OTC: NWLTF) and real estate investment trust Northern Property REIT (TSX: NPR-U, OTC: NPRUF) offer secondary but stable ways to play the build-out of oil and gas infrastructure and production in Western Canada.

Newalta’s New Markets division provides engineered environmental solutions to heavy-oil customers in Alberta and Saskatchewan and to oil and gas customers in the US. It works with customers on site and/or from its facilities to deal with tailings ponds, drill cuttings and slop oil.

New Markets is seeing solid growth–and driving expansion for the entire company–in its work processing mature fine tailings (MFT) for projects such as the Syncrude oil sands joint venture in Alberta.

Management noted that activity at its Syncrude MFT contract continued to ramp up during the third quarter, while a contract with Royal Dutch Shell Plc’s (London: RDSA, NYSE: RDS/A) Canadian unit is on schedule to move from the engineering and construction phase to the processing phase this month.

Heavy oil will likely drive growth in 2013 and into 2014.

In the US Newalta continues to expand its on-site operations, particularly in the Bakken and Eagle Ford plays. The company opened a satellite facility in Texas during the second quarter of 2013 and expects to open two more facilities in the US before the end of the year.

Newalta’s Oilfield segment–which provides waste processing services to oil and gas customers through facilities, satellites and onsite projects, recovering oil and water from oilfield waste streams and reducing the overall waste going to landfills–is seeing normalization of equipment utilization rates in Western Canada in the range of 40 percent to 55 percent from seasonally low levels of approximately 14 percent in the second quarter.

Newalta opened a satellite facility in Kindersley, Saskatchewan, and commercialized a solids processing technology as a new service offering at one of its other facilities.

The Industrial business specializes in lead and oil recycling on site for chemical and petrochemical, mining, pulp and paper, refineries and municipal waste streams. Its event-driven specialty unit saw solid activity in the third quarter, and management expects volumes to reach their annual permitted capacity of 750,000 metric tons by year’s end.

Newalta’s recent growth initiatives paid off in the form of solid contributions to second-quarter earnings. And management is seeing signs that these trends strengthened during the third quarter. Guidance is for adjusted EBITDA “at least 20 percent higher than” 2012, driven by increased processing volumes from its MFT contracts and increased contributions from capital deployed in New Markets and Oilfield in 2012.

Second-quarter revenue grew 15 percent to CAD196.1 million, as adjusted EBITDA increased 27 percent to CAD38.4 million.

Revenue from New Markets in the quarter rose 45 percent to CAD56.1 million, with gross profit rising 38 percent to CAD19.3 million on returns from investment in two on-site contracts to process mature fine tailings (MFT).

Oilfield revenue was CAD39.5 million, flat on a year-over-year basis. Gross profit, however, surged by 32 percent, though slower drilling activity limited upside. Industrial revenue was up 7 percent to CAD100.5 million, though gross profit slipped by CAD2.1 million to CAD12.3 million.

Newalta’s capital investment plan for 2013 is on budget–about CAD190 million, with 80 percent earmarked for growth initiatives, with 70 percent levered to oilfield services–and the company’s strong balance sheet and operational track record make a solid foundation for continuing growth into 2014. Newalta is a buy under USD17.50.

REITs are not popular right now. And that means it’s probably a good time for new money to establish positions in those with high-quality portfolios concentrated in growing economies.

Northern Property REIT generated 37.1 percent of its 2012 revenue from Canada’s growth-engine provincial economies, Alberta and British Columbia, where oil and gas development and production promise to support more growth in coming years.

Northern Property, along with second-quarter results, announced a 3.3 percent increase to its monthly distribution rate. That’s a sure sign of management confidence in the sustainability as well as the growth trajectory for its operations.

The first installment at the new rate of CAD0.13167, or CAD1.58 on an annualized basis, up from a prior rate of CAD1.53, will be made on Oct. 15.

Northern Property reported second-quarter funds from operations (FFO) per unit of CAD0.57, up 7.5 percent on a continuing operations basis from CAD0.53 a year ago. Acquisitions completed during 2012 and developments completed during 2013 are starting to drive growth for the REIT and its unitholders.

Existing properties are also performing well, with same-door net operating income up 1.5 percent for the second quarter. Management noted that vacancies remain at higher-than-historical levels but have leveled off compared to the first quarter.

Northern Property’s plan is to continue to buy existing assets on a selective basis, with an eye on maintaining portfolio quality. Management noted that prices have begun to come down for assets that fit its profile, evidenced by the acquisition of 229 units in Fort McMurray, Alberta, that will close early in the third quarter at a price of CAD43.3 million.

The acquisition pipeline has improved, with 153 multi-family units under conditional contract for an aggregate purchase price of approximately CAD13 million expected to close in the third quarter. We’ll have an update on this after Northern Property reports third-quarter results on or about Nov. 7.

Management described the distribution increase “as a sign of our confidence in our business fundamentals” and validation that Northern Property has “one of the healthiest balance sheets in the Canadian multi-family space.” It’s the seventh distribution increase since the REIT went public in June 2002 and the first since August 2010.

On July 29, 2013, Northern Property announced a normal course issuer bid that allows it to buy back approximately 3 million units through July 29, 2014, in light of management’s view that the recent interest-rate driven pullback in the unit price is overdone and has left the REIT’s units undervalued.

Northern Property, along with its fellow Canadian REITs, has sold off hard since the US Federal Reserve started dropping hints that its USD80 billion per month bond-buying program–popularly known as “QE3,” denoting the third round of the Fed’s effort at quantitative easing of the money supply–would at some point, one triggered by economic data, come to an end.

Investors have dropped traditional high-yielding equities such as REITs and utilities en masse, as interest rates have risen since May on indications of imminent QE3 “tapering.” The evidence is far from dispositive that a rising interest rate environment is necessarily a negative condition for REITs.

Investors who rotated out of traditional income generators such as US Treasuries due to low yields in this period of historically low official rates and into REITs may have reversed the trade as the “yield gap” narrowed.

They’re now eschewing solid, sustainable growth and income for yields that remain at historically low levels and will likely remain so for some time given the Fed’s commitment to the “zero bound” on its benchmark fed funds rate into 2015.

And the factor that will drive market rates higher–an improving economy–is, for REITs as it is for high-yielding oil and gas exploration and production companies, a net positive. Faster growth and lower unemployment translate into higher rents in areas such as Alberta and British Columbia that will drive North American expansion.

History suggests operational performance for REITs doesn’t suffer in a rising interest rate environment, despite their near-constant need for financing. With higher rates, in short, come higher rents.

It’s impossible to forecast where exactly interest rates will eventually land. The simple reality of the matter is that long-term lending rates remain exceptionally low, notwithstanding the upward trend of the last few months. And, as management recently noted, every mortgage that Northern Property has renewed recently has been done on better terms than those that have expired.

Northern Property, which is yielding 5.8 percent as of this writing, is a buy under USD30.

For more information on Newalta Corp, go to How They Rate under Energy Services.

Northern Property REIT is tracked under Real Estate Trusts. Click on their US symbols to see all previous writeups in Canadian Edge and Maple Leaf Memo.

Click on the Toronto Stock Exchange (TSX) symbol to go to their Google Finance pages for a wealth of information, ranging from news releases to price charts. Click on their names to go directly to company websites.

Newalta has a market capitalization of CAD875.4 million as of Oct. 2, 2013. Northern Property is of comparable size at CAD937 million. Both stocks have plenty of liquidity on both sides of the border, both in TSX and US-listed symbols.

Newalta trades on the US over-the-counter (OTC) market under the symbol NWLTF. Northern Property also trades on the US OTC market under the symbol NPRUF.

Both companies have good coverage on Bay Street and Wall Street. Newalta has 10 analysts tracking it, with nine rating the stock a “buy,” zero rating it a “hold” and one rating it a “sell.”

The average 12-month target price for Newalta, based on forecasts from eight of the 10 analysts covering it, is CAD18.27. This implies upside from Newalta’s Oct. 2, 2013, closing price of CAD15.89 of 23.3 percent, including 12 monthly dividend payments of CAD0.11 per share, or CAD1.32 on an annualized basis.

Northern Property is also covered by 10 analysts, five of whom rate it a “buy.” Three rate Northern Property it a hold, while two analysts rate it a “sell.”

The average 12-month target price, based on forecasts from nine of the 10 analysts covering the REIT, is CAD29.89. Upside from here, based on Northern Property’s Oct. 2, 2013, closing price of CAD27.34 and including 12 monthly dividend payments at the REIT’s new, higher monthly rate of CAD0.1317 per unit, or CAD1.5804 annualized, is 15.1 percent.

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 Newalta are 100 percent qualified for US income tax purposes. Newalta’s 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 Newalta. For US investors, dividends paid by Newalta 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.

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.