With Starwood at a recent $17.60, and Blackstone at $18.50, the stocks are trading at discounts to their book values of 10% and 20%, respectively, notes BTIG analyst Eric Hagen. Their dividends are more reliable than many peers, so today’s market dislocations make these REIT stocks attractive.

“That’s when you can really make money in these stocks,” Hagen tells Barron’s. “You can clip the dividend and get some valuation improvement on top of it.”

The current banking crunch is reminiscent of the era when commercial mortgage REITs came into existence, 15 years ago, to fill a void left by the 2008 financial crisis. Today, the trusts hold loans across property types that range across multifamily housing, offices, hotels, and retail.

Mortgage REITs originate or buy loans that are secured by commercial properties, in the way that a home mortgage is secured by a house. Compared with deposit-funded banks, the mortgage REITs have better matched assets and liabilities, because they fund loans with capital from issuing stock and debt. Since their loans are well-secured, the mortgage REIT stocks fared better in the post-Covid real estate shake-up than shares of office-owning equity REITs like

Boston Properties

(BXP) and Vornado Realty Trust (VNO).

The real estate crunch and rising rates affected some borrowers of the mortgage REITs, so the group’s reported earnings in 2022 were dinged by reserves taken under a conservative accounting standard that began in 2020.

Earnings at Blackstone Mortgage Trust last year were $1.46 a share after reserves, but $2.87 a share before such noncash charges. Even in the challenging December quarter, the REIT’s cash earnings of 80 cents a share comfortably covered its 62 cent dividend.

Starwood Property Trust’s cash earnings in 2022 were $2.28 a share. As it originates new loans, the REIT has reduced the portion of its portfolio that’s collateralized by retail and office buildings, and increased multifamily and industrial properties.

The REIT benefited from rising rates because its loans all have floating rates, said chief executive Barry Sternlicht on the earnings call this month. “We can earn our dividend doing almost nothing,” he told listeners. “But it’s primarily because the floating rate book is carrying the firm.”

With banks on the sidelines, the lending environment is one of the best that Starwood has seen in its 12 year existence, said Sternlicht. Starwood is playing defense, for now, by fortifying its balance sheet. But when its shares rise back to book value, Sternlicht said his firm can raise capital and make “extraordinary” loans.

Analyst Hagen expects that the stresses in commercial real estate are not done. But much of that risk has been discounted in the prices of REIT stocks, he says. Along with the Starwood and Blackstone REITs, the BTIG analyst recommends the shares of

Ladder Capital

(LADR), whose niche in midmarket loans below $50 million is where regional banks will likely pull back. At a recent $9.50, Ladder trades at a 17% discount to book value and sports a 9% dividend yield.

“Bank stress may yet intensify,” says Hagan, “but that doesn’t change how we feel about the longer term.”

Write to Bill Alpert at william.alpert@barrons.com