Granite Point Mortgage Trust (GPMT), like many of its commercial mortgage REIT peers, is navigating a choppy commercial real estate market. Q4 2023 and Q1 2024 earnings calls show a company prioritizing liquidity while facing troubled office loans and an uncertain economic future. But a less-discussed factor is emerging as a potential wildcard: multifamily.

While office sector struggles have dominated the conversation, leading to risk rating downgrades and increased CECL reserves, GPMT has portrayed multifamily as a stable sector. Executives highlight its favorable fundamentals, strong rent growth, and robust sponsor support. They downplayed three multifamily loans downgraded to risk rating 5 in Q1, attributing them to local market issues and predicting "modest" and "not very material" losses in this sector.

However, a shift in tone is noticeable in the transcripts. In the Q4 call, CIO Steve Alpart acknowledged concerns about new supply in the Sunbelt, especially Texas, where rent growth has slowed. He stated, "While our multifamily business plans aren't 'primarily based on rent growth,' they are 'watching some of the markets in Texas' carefully."

This caution grew in the Q1 call. CEO Jack Taylor admitted, "There's increasing concern in general about the multifamily sector in the market." Though still confident in their portfolio due to strong locations and sponsors, the mention of this growing market concern is significant.

A closer look at the numbers reinforces this shift. While GPMT's specific CECL reserve breakdown is not public, we can glean insights from overall reserve allocation. In Q1 2024, over 70% of the total CECL reserve is allocated to "select individually assessed loans," suggesting an average estimated loss severity of about 29%. While likely linked to troubled office loans, the Q1 inclusion of multifamily downgrades suggests at least some of this reserve is allocated to multifamily assets.

Is GPMT Downplaying Multifamily Risks?

The allocation of reserves to multifamily assets and the increasingly cautious tone suggest a possible discrepancy between public messaging and reality. Perhaps GPMT, like many in the market, underestimated the impact of rising interest rates and slowing economic growth on multifamily. While older loans may perform well, newer ones originated at the market peak could be more susceptible to value drops and sponsor fatigue, especially in markets with rising supply and slowing rent growth.

GPMT's aggressive stock buybacks further support this hypothesis. While buybacks can be beneficial at current valuations, prioritizing them over strengthening the balance sheet amid a potential multifamily storm could be risky. It suggests prioritizing short-term shareholder returns over long-term portfolio stability, betting on a swift multifamily recovery that may not materialize.

Potential Impact of the Multifamily Wildcard

The implications of this wildcard are significant. Greater than expected credit deterioration in GPMT's multifamily portfolio could pressure book value, earnings, and the company's ability to maintain its dividend. This adds more uncertainty to GPMT's already challenging outlook, making it a stock to monitor closely.

GPMT's Changing Commentary on Multifamily

The following chart tracks GPMT executives' changing commentary on the multifamily sector throughout Q4 2023 and Q1 2024, highlighting the shift from optimism to cautious observation.

Conclusion

While the office sector drama has overshadowed GPMT's multifamily wildcard, the subtle warnings in the transcripts and the data warrant attention. This potential silent storm could have a significant impact.

"Fun Fact: The term "wildcard" originates from poker, where a card can represent any other card, adding an element of unpredictability to the game. In finance, a wildcard refers to a factor that is difficult to predict and could significantly impact outcomes, much like GPMT's multifamily exposure."