Something old and something new is what you get as November’s High Yield of the Month offerings. The newcomer is another super yielder that’s recently tacked on gains but still looks undervalued relative to a recent dramatic reduction in business risk. Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF) is dishing off a yield of roughly 11 percent that it will maintain after converting to a corporation on Jan. 1.

The old is RioCan REIT (TSX: REI-U, OTC: RIUOCF), the owner of high-quality shopping malls across Canada that’s used the last two years to dramatically boost its portfolio growth potential. Its 6 percent yield has consistently grown since I first added it to the Portfolio as an original member back in July 2004. And growth is accelerating again as recent investments pay off.

Consumers’ has been the bigger winner thus far in 2010, up a little over 60 percent to RioCan’s 30 percent. A brief look at its price chart, however, also reveals a wilder ride over the past several years. In fact, this year’s gain represents only a small recovery from heavy losses sustained from the trust’s mid-2007 peak to its late-2009 nadir, a drop of some 80 percent.

Consumers’ is attractive now for two reasons. One is the yield of nearly 11 percent.

The other is the company has dramatically improved the odds it can sustain that dividend in the coming years, something it accomplished by putting several potentially life-threatening risks behind it.

And if it does, there are plenty more share price gains in store.

Let me start with a note of qualification. I’ve been burned by bargain-hunting in Consumers’ before. For the record, I recommended the stock in October 2008 as a High Yield of the Month, after it had already fallen in half from its highs and was yielding 13 percent plus. I then sold it in November 2009 within weeks of what proved to be the stock’s ultimate bottom for a negative return of about 50 percent, following a 50 percent cut in the company’s dividend.

The Consumers’ round-turn is by far my worst trade since the founding of Canadian Edge. And re-reading the advice I gave on both ends–click through the previous two hyperlinked text selections–isn’t easy. But I did get some things right.

First, in late 2008 the company had CAD557.9 million in bridge loans, partly from buying sub-metering company Stratacon. Concerns it would be unable to refinance them were a major factor dragging the stock down to the level where I recommended it. But since then management has pushed out significant debt maturities to 2013 without hardship.

Second, the company has been successful boosting its market share in sub-metering through acquisitions. The biggest to date was completed in early October, the buyout of Enbridge Electric Connections for CAD23.2 million in cash. That transaction effectively doubled the size of Consumers’ sub-metering business in Canada, combining the country’s two largest non-utility players.

Finally, the company’s core waterheater rental business did prove itself once again to be recession-resistant. There was an uptick in customer attrition during the worst of the downturn, accentuated by increased competition. Second-quarter 2010 rental attrition, however, was down more than 30 percent from year-earlier levels to just 1.6 percent. That’s stabilized revenue, even as management has made progress with margins by cutting costs.

What I missed completely back in late 2008 was growing resistance among apartment tenants to sub-metering in general, which in early 2009 boiled over with an order by the Ontario Energy Board (OEB) to effectively suspend all sub-metering activity. Not only was Consumers’ forbidden from making new sales. But the landlords that were its customers were forced to go back and get permission from tenants to use equipment already installed.

To management’s credit, it didn’t give up on sub-metering but immediately swung into action to win a better ruling in Ontario, where regulators were also sympathetic to the goal of energy conservation that sub-metering enables. Stratacon, however, went overnight from a profit center to a severe drain on resources. And by late 2009 management had no choice but to cut about half of the monthly distribution to conserve cash.

At that point the combination of the dividend cut, recession-related weakness in the core waterheater rental business and the seeming glacial pace of review at the OEB was enough for me to pull the plug on Consumers’ and recommend a switch to Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF. That hasn’t been a bad trade by any means, and those who did move have enjoyed a return of roughly 50 percent.

But my sale proved to be pretty much the low point for Consumers’. The first really positive news came in mid-August with second-quarter results, which, while hurt by the contraction of Stratacon, clearly showed stabilization in the waterheater business. The Enbridge acquisition announced in early September and completed Oct. 1 was clearly an aggressive bet on sub-metering, but it affirmed the company’s financial strength.

Then, on Oct. 13, Consumers’ announced it would convert to a corporation on Jan. 1, 2011, without cutting its distribution.

Finally, and most bullish of all, on Oct. 19 the Government of Ontario published regulations under the Energy Consumer Protection Act of 2010 and the Residential Tenancies Act of 2006 setting rules for sub-metering to kick in Jan. 1, 2011.

In management’s words, these provide a “clear path” for the business that should turn it back into a profit center.

The upshot: The factors that pushed Consumers’ unit price to its current level of one-third its May 2007 high no longer exist.

There are still some hills to climb before we again see the stock back in the teens, where it consistently traded from early 2004 to early 2008. But the business fundamentals are back in place for a solid recovery.

And that’s in addition to the nearly 11 percent yield that, even with Stratacon bleeding cash, has been covered with distributable cash flow by a 2-to-1 margin this year thus far.

What could go wrong at Consumers’? I’d be concerned if the waterheater rental attrition rate took another upward spike when third quarter earnings are announced for the company on Nov. 8. Stratacon is likely to shrink further in the second half of the year. But if it’s still floundering in the first half of 2011, there would be new questions about whether it really is the untapped, low-risk, fee-based business advertised. And, of course, I’ll be keeping an extra eye on the payout ratio, particularly with an estimated CAD6 million to CD8.5 million in cash taxes anticipated for calendar 2011.

These risks account for why Consumers’ is going to the Aggressive Holdings, despite limited exposure to commodity price swings. Consumers’ Waterheater Income Fund is a buy up to USD6.50, but only for those mindful of its risks as well as my less-than-perfect track record the last time it was a CE Portfolio holding.

In contrast, even the most conservative investors will find much to like in RioCan’s reliability, unrecognized growth potential and 6 percent yield. The latter is on the low side for CE Portfolio Holdings but is several percentage points above payouts offered by US real estate investment trusts of similar quality, and is headed for growth as well.

Canada’s biggest REIT, RioCan had no problem raising capital even in the darkest days of the credit crunch. And management used that to full advantage, filling its cash coffers to overflow with the goal of deploying the money into acquisitions of quality properties from distressed owners.

Unfortunately, bargain acquisition opportunities took longer to materialize than expected. And RioCan suffered several quarters of depressed profits, as dilution from equity issues and interest paid on new debt far offset what it could from cash in the bank.

Management’s patience, however, is now paying off in spades. For the second consecutive quarter, the REIT posted explosive growth (20 percent) in per unit funds from operations (FFO), fueled by net operating income (NOI) growth of CAD21.8 million due in large part to successful acquisitions of shopping mall properties across Canada, as well as in the US through the partnership with Cedar Shopping Centers (NYSE: CDR).

RioCan also reported same-store NOI growth of 2.2 percent, reflecting higher rents, lower bad debt and fewer vacancies. That rate is expected to accelerate to 3.5 percent in the fourth quarter, even as several greenfield, or new, construction projects come on line.

According to Senior Vice President and CFO Raghunath Davloor, speaking during the REIT’s third-quarter conference call, RioCan completed 16 separate acquisitions in North America last quarter. The company has another 197 million prospective deals on which it has “completed due diligence” and has “waived conditions.” And it expects to complete CAD1 billion total purchases by year-end.

Mortgage financings in the third quarter were for an average term of 6.1 years at an average rate of 4.9 percent. And management is currently securing rates at or below 4.75 percent versus paper coming due in the next six months at an average rate of 5.8 percent. That will further boost the balance sheet and widen profit spreads on new deals. Debt-to-adjusted book value is 51 percent, or less than 50 percent factoring in current property values.

RioCan’s secret during every downturn is quality. High-quality tenants like Wal-Mart Stores (NYSE: WMT) operating under long-term leases anchor all of its properties. That ensures superior occupancy rates (97.1 percent in the third quarter) as well as strong rent growth even in lean times. Renewal retention is better than 90 percent in 2010, with an average rent increase of 10.8 percent. Unbudgeted vacancies fell nearly in half over the past year, a testament to the REIT’s ability to pick prime spots as well as customers.

Recently acquired US properties also fit the bill. The company enjoys an economic occupancy rate of nearly 98 percent, far superior to the typical US-based retail REIT. Nearly 60 percent of revenue from US properties is from the highest-quality anchor tenants, most of which RioCan has experience with on its side of the border.

As for dividend growth, RioCan is clearly in expansion mode, with capital cheap and a plethora of distressed owners ready to sell good properties for cash. But the longer we wait, the bigger the potential payoff. And as the US economy does finally return to health, growth will reach new levels.

Even a casual glance reveals RioCan has nearly doubled from its early 2009 low. Units are still below the mid-2007 highs, however. And with enterprise value moving beyond CAD10 billion, the REIT is worth a lot more now than then.

What could go wrong at RioCan? An unexpected spike in interest rates would no doubt put a crimp in management’s plans for 2011, by driving up the cost of acquisition capital. The REIT’s refinancing needs are nicely spread out, and cash flow is rising sharply, so it’s shielded on that score.

RioCan’s expansion into the US also means it has to manage currency fluctuations as well as what’s still arguably a weaker economy south of the border. And, as is the situation for all REITs, the surprise bankruptcy of a major tenant would cause some pain, though management has protected itself somewhat by focusing on only the strongest companies for rental and diversifying geographically and by revenue source.

More than perhaps any other business, REIT investors are buying management. RioCan is attractive not just for its unmatched portfolio of high-quality properties and access to low-cost capital to buy more, or even for its yield and growth potential. Those are all certainly part of the story. But what holds it altogether is superb management, which has been able to navigate every hurdle to the company’s prosperity. That’s the real reason to buy RioCan REIT up to USD23 if you haven’t already.

As noted above, investors in these companies won’t have to worry about 2011. Assuming its plan wins shareholder approval at a vote slated for Nov. 25 Consumers’ will convert from trust to corporation on a unit-for-share basis.

The company at that time will change its name to EnerCare Solutions Inc, at which point it will likely get new Toronto Stock Exchange (TSX) and US over-the-counter (OTC) trading symbols. The event will be non-taxable.

RioCan, meanwhile, expects to comply with all requirements to retain its tax-advantaged status after Jan. 1. Alone of all income trusts, REITs were granted a permanent extension of rules allowing them to pass through income to investors without paying corporate tax.

There were additional rules attached, governing such issues as the type of properties acceptable to own, which RioCan has now met.

For more information on Consumers’ and RioCan, 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. Consumers’ is smaller at a market cap of about CAD323 million, and its units trade over the counter in the US. RioCan has a market cap of CAD5.83 billion and also lists OTC in the US.

I’ve recommended both of these securities in the past, and readers have reported ease in trading them. Some states have “blue sky” laws that may not allow your broker to pitch either or both of these companies 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 TSX or OTC in the US.

Click on the trusts’ names to go directly to their websites. Consumers’ is listed under Gas/Propane, while RioCan can be found under Real Estate Trusts. Click on their US symbols to see all previous writeups in Canadian Edge and its weekly companion Maple Leaf Memo. Note RioCan has been in the Portfolio since the very first issue of Canadian Edge in July 2004. Consumers’ is a former Portfolio member and now a new addition to the Aggressive Holdings.

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. For direct links see 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 the trusts convert to corporations.