(5) Variable Interest Entities and Collateralized Loan Obligations

On February 14, 2018 (the “Closing Date”), the Company entered into a collateralized loan obligation (“TRTX 2018-FL1”) through its wholly-owned subsidiaries TPG Real Estate Finance 2018-FL1 Issuer, Ltd., an exempted company incorporated in the Cayman Islands with limited liability, as issuer (the “Issuer”), and TPG RE Finance Trust 2018-FL1 Co-Issuer, LLC, a Delaware limited liability company, as co-issuer (the “Co-Issuer” and together with the Issuer, the “Issuers”). On the Closing Date, the Issuer issued $820.5 million principal amount of notes (the “Notes”). The Co-Issuer co-issued $745.9 million principal amount of investment grade-rated notes which were purchased by third party investors. Concurrently with the issuance of the Notes, the Issuer also issued preferred shares, par value $0.001 per share and with an aggregate liquidation preference and notional amount equal to $1,000 per share (the “Preferred Shares” and, together with the Notes, the “Securities”), to TPG RE Finance Trust 2018-FL1 Retention Holder, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company. The Company retained ownership of $186.5 million of the Notes sold and Preferred Shares in the Issuers.

Proceeds from the issuance of the Securities were used by the Issuers to purchase one commercial real estate whole loan (the “Whole Loan) and 25 fully-funded pari passu participations (the “Pari Passu Participations,” and, together with the Whole Loan, the “Mortgage Assets”) in certain commercial real estate mortgage loans. The Mortgage Assets were purchased by the Issuer from TPG RE Finance Trust CLO Loan Seller, LLC, a Delaware limited liability company, wholly-owned subsidiary of the Company and an affiliate of the Issuers (the “Seller”). The Mortgage Assets represented 25.8% of the aggregate unpaid principal balance of the Company’s loan investment portfolio, and had an aggregate principal balance of approximately $932.4 million, as of March 31, 2018.

Proceeds received by the Seller from the issuance of the Securities were used: (i) to repay an aggregate of $670.3 million of borrowings under the Company’s secured revolving repurchase facilities with Goldman Sachs Bank USA, Morgan Stanley Bank, N.A. and Wells Fargo Bank, National Association, thus creating additional borrowing capacity for new loan originations; (ii) to pay transactions expenses; and (iii) for new loan originations and general corporate purposes.

In accordance with ASC 810, the Company evaluated the key attributes of the Issuers to determine if they were VIEs and, if so, whether the Company was the primary beneficiary of the Issuers’ operating activities. This analysis caused the Company to conclude that the Issuers were VIEs, that the Company was the primary beneficiary and it would consolidate the entities.

The carrying values of the Company’s total assets and total liabilities related to TRTX 2018-FL1 at March 31, 2018 included the following VIE assets and liabilities (dollars in thousands):

	March 31, 2018
ASSETS
Cash and Cash Equivalents	$	2,386
Accrued Interest Receivable		2,693
Loans Held for Investment		932,380
Total Assets	$	937,459
LIABILITIES
Accrued Interest Payable	$	(969	)
Accrued Expenses		(124	)
Collateralized Loan Obligation		(737,433	)
Total Liabilities	$	(738,526	)

Assets held by the Issuers are restricted and can only be used to settle obligations of the Issuers. The liabilities of the Issuers are non-recourse to the Company and can only be satisfied from the Issuers’ assets.

The following table outlines TRTX 2018-FL1 borrowings and loan collateral under the Company’s consolidated Issuers (dollars in thousands):

As of March 31, 2018
Collateral (loan investments)				Debt (notes issued)
Outstanding Principal		Carrying Value		Face Value			Carrying Value
$	932,380	$	932,380	$	(745,904	)	$	(737,433	)

On December 18, 2014, the Company entered into a collateralized loan obligation (“2014-CLO”) through TPG RE Finance Trust CLO Issuer, L.P., a wholly-owned subsidiary of the Company (“CLO Issuer”) and on December 29, 2014, the Company acquired from German American Capital Corporation (“GACC”) a portfolio of 75% participation interests in certain loans secured primarily by first mortgages on commercial properties, with a face value of approximately $2.4 billion. To partially fund the investment, on December 18, 2014, the CLO Issuer issued a Class A Note secured by the Company’s 75% participation interests in the portfolio of loans acquired. In accordance with ASC 810, the Company evaluated the key attributes of the CLO Issuer to determine if it was a VIE and, if so, whether the Company was the primary beneficiary of the CLO Issuer’s operating activities. This analysis resulted in the Company concluding that the CLO Issuer was a VIE, that the Company was the primary beneficiary, and that it would consolidate the entity.

On August 16, 2017, the outstanding principal balance of the Class A Note issued by the CLO Issuer was approximately $118.0 million. On August 16, 2017, the CLO Issuer sold to GACC two first mortgage loan participation interests with an aggregate unpaid principal balance of $12.8 million that collateralized the Class A Note in part and recognized in Other income, net a $0.2 million loss on sale. The sales price of the two first mortgage loans was approximately par value. These loans were sold because they were determined to no longer be consistent with the Company’s current investment strategy.

On August 18, 2017, one of the Company’s wholly-owned subsidiaries purchased from the CLO Issuer seven first mortgage loan participation interests with an aggregate unpaid principal balance of $138.5 million that collateralized the remainder of the Class A Note issued by the CLO Issuer. The first mortgage loan participation interests were sold by the CLO Issuer for approximately par value. On August 23, 2017, proceeds from both transactions were used in combination with approximately $3.0 million of Company cash to retire all amounts outstanding under the Class A Note issued by the CLO Issuer, which totaled $118.0 million. 2014-CLO was subsequently terminated.

For the three months ended March 31, 2018 and 2017, $3.4 million and $5.4 million is included in the Company’s consolidated statements of income as interest expense related to TRTX 2018-FL1 and 2014-CLO, respectively (including amortization of deferred financing costs).