Starwood Property Trust Q1 Rental Income Shoots Up While It Settles Troubled Assets

Starwood Property Trust kicked off 2026 with another active investment quarter, with notably improved operating income levels compared to last year. But earnings slipped as the mortgage REIT continued working through legacy assets and repositioning its balance sheet.

The Miami Beach-based lender and investment firm reported $51.9 million in net income, down from $96.9 million in the fourth quarter of 2025 and less than half of the $112.3 million in the first quarter of 2025. Distributable earnings totaled $147.3 million, compared with $159.5 million in the previous quarter and $156.3 million this time last year.

“We continue to make steady progress resolving legacy assets. Non-accrual and REO [real estate owned] balances declined again this quarter, and we have now resolved over $300 million of assets that were previously a drag on earnings,” Jeffrey DiModica, Starwood president, said during the firm’s earnings call on Friday. “Our approach to credit remains consistent. We lean into situations where we have conviction and control … rather than fire-sale assets at a worse outcome to shareholders.”

Starwood’s revenue was higher in the first quarter at $512.5 million, up from $492.9 million in the fourth quarter and $418.2 million in the first quarter of 2025. Rental income also increased significantly as the company scaled its property and net-lease holdings, rising to $80 million, compared to $67.5 million in the fourth quarter and $29.2 million a year earlier. 

Starwood’s property net operating income was roughly $56.8 million, up from about $52 million in the fourth quarter and $14.4 million in the prior-year quarter.

“Our company is diverse with commercial lending comprising just 52 percent of our investment base and owned property increasing to 25 percent this quarter,” Rina Paniry, chief financial officer, added. “We are really not a typical mortgage REIT.”

Chairman and CEO Barry Sternlicht said real estate is “coming out of the frozen tundra” after the last three years, and that “the real estate markets are curing themselves,” though slowly and not quarter to quarter. Sternlicht cited reshoring, falling new supply and stable interest rates, saying the sector is moving “from headwinds to tailwinds.”

“It is a miraculous economy, but it’s not your grandma’s economy,” Sternlicht added.

Starwood remained active on the investment front, deploying $2.5 billion during the first quarter, and already another $1.5 billion since the end of March. The firm said it is focused on “disciplined origination” and balance sheet optimization.

“Capital markets have been volatile to start the year, driven largely by geopolitical developments in the Middle East,” DiModica said. “Treasury yields and credit spreads have moved with each headline, and while volatility has increased, the overall environment remains relatively stable.”

Commercial and residential lending are still Starwood’s largest engines. Starwood originated $1.5 billion of commercial lending commitments in the quarter, and the segment’s portfolio reached $16.7 billion, its highest level in three years.

Starwood’s infrastructure lending business also reached a record, with $597 million in new commitments. The company also said its net-lease portfolio reached a record $2.5 billion, with a 17.4-year weighted average lease term.

Starwood completed its seventh infrastructure commercial real estate collateralized loan obligations with a $600 million issuance, and completed a $466 million net-lease asset-backed securities at a record-tight spread for that platform.

Starwood also repurchased $20 million of common shares during the quarter under a $400 million share and convertible note repurchase program announced in February.

Starwood said it resolved $387 million of legacy assets in the quarter, including $347 million through foreclosure and a $40 million third-party sale at a $5 million distributable earnings loss. For example, in April, Starwood subsidiary LNR Partners sold the Scribner Building at 597-599 Fifth Avenue in Manhattan to Aurora Capital for $54 million, two years after taking back the keys from Thor Equities.

Starwood said Friday it foreclosed on three nonaccrual loans: a $248 million mixed-use Dallas asset split, a $71 million Phoenix multifamily asset, and a $28 million Dallas multifamily asset. Two multifamily loans were downgraded: an $81 million Georgia multifamily loan where debt yield is below the extension threshold, and a $40 million Texas multifamily loan where the sponsor signaled it may stop supporting the asset.

Also, Starwood bought a $114 million senior position on a large industrial asset near Manhattan, and management said leases are under negotiation for almost all available space.

Starwood said it expects to resolve about $900 million of nonaccrual/REO assets by the end of the year, and another roughly $500 million in 2027.

But the company is also still leaning more into sectors where it sees stronger demand, which means moving away from office — which now makes up just about 7.6 percent of the commercial asset side of the portfolio — and more into multifamily, industrial, infrastructure lending, residential lending, net lease and data centers. 

Sternlicht said multifamily supply is dropping dramatically, industrial supply is stagnant — almost nonexistent — and office, retail and senior housing are also benefiting from reduced capital flowing into new supply.

DiModica said Starwood Capital is one of the largest private data center owners in the world. In March, a Starwood Capital affiliate agreed to pay $166.8 million for 42 acres for data center development in Virginia, the U.S. capital for digital infrastructure. 

Separately, an affiliate of Starwood Property Trust provided a $153.5 million acquisition loan tied to a $235 million purchase of a 17-building R&D portfolio in Southern California.

Sternlicht also said the net-lease platform may need to be scaled or otherwise repositioned if the dilution remains too much for shareholders to parse. He also said the platform is 100 percent occupied with zero defaults and could have meaningful stand-alone value.

“One way or another, we’re going to get this thing to scale or spin it out, or do something that will create the value in the business,” he said.

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.