The Company originates and acquires first mortgage and mezzanine loans secured by commercial properties. The Company considers these loans to comprise a single portfolio of mortgage loans, and the Company has developed its systematic methodology to determine the allowance for credit losses based on a single portfolio. For purposes of certain disclosures herein, the Company disaggregates this portfolio segment into the following classes of finance receivables: senior loans; and subordinated and mezzanine loans. These loans can potentially subject the Company to concentrations of credit risk, including, without limitation: property type collateralizing the loan; loan category; loan size; loans to a single sponsor; and loans in a single geographic area. The Company’s loans held for investment are accounted for at amortized cost. Interest accrued but not yet collected is separately reported within accrued interest and fees receivable on the Company’s consolidated balance sheets. Amounts within that caption relating to loans held for investment were $13.5 million and $14.3 million as of June 30, 2022 and December 31, 2021, respectively.

During the six months ended June 30, 2022, the Company originated twelve mortgage loans with a total commitment of $613.3 million, an initial unpaid principal balance of $537.3 million, and unfunded commitments at closing of $76.0 million.

During the six months ended June 30, 2022, the Company received eight full loan repayments of $717.3 million, and partial principal payments including accrued PIK interest payments, of $87.8 million across nine loans, for total loan repayments of $805.0 million.

The following table details overall statistics for the Company’s loans held for investment portfolio (dollars in thousands):


	June 30, 2022						December 31, 2021
	Balance sheet portfolio			Total loan exposure(1)			Balance sheet portfolio			Total loan exposure(1)
Number of loans	73			74			69			70
Floating rate loans	100.0		%	100.0		%	100.0		%	100.0		%
Total loan commitment	$	5,186,472		$	5,318,472		$	5,411,944		$	5,543,944
Unpaid principal balance(2)	$	4,710,161		$	4,842,161		$	4,919,343		$	5,051,343
Unfunded loan commitments(3)	$	470,869		$	470,869		$	487,773		$	487,773
Amortized cost	$	4,701,410		$	4,701,410		$	4,909,202		$	4,909,202
Weighted average credit spread	3.4		%	3.5		%	3.4		%	3.4		%
Weighted average all-in yield(4)	5.6		%	5.6		%	4.8		%	4.8		%
Weighted average term to extended maturity (in years)(5)	2.7			2.8			2.8			2.8

_______________________

(1)In certain instances, the Company creates structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third-party. In either case, the senior mortgage loan (i.e., the non-consolidated senior interest) is not included on the Company’s balance sheet. When the Company creates structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third-party, the Company retains on its balance sheet a mezzanine loan. Total loan exposure encompasses the entire loan portfolio the Company originated, acquired and financed. As of June 30, 2022 and December 31, 2021, the Company had outstanding one non-consolidated senior interest of $132.0 million.

(2)Unpaid principal balance includes PIK interest of $2.4 million and $3.0 million as of June 30, 2022 and December 31, 2021, respectively.

(3)Unfunded loan commitments may be funded over the term of each loan, subject in certain cases to an expiration date or a force-funding date, primarily to finance property improvements or lease-related expenditures by the Company’s borrowers, to finance operating deficits during renovation and lease-up, and in limited instances to finance construction.

(4)As of June 30, 2022, all of the Company’s loans were floating rate. Loans originated by the Company before December 31, 2021 are indexed to LIBOR, while loans originated after January 1, 2022 are indexed to Term SOFR. As of June 30, 2022, based on the total loan commitments of the Company’s loan portfolio, 11.8% (or $0.6 billion) of the Company’s loans were subject to Term SOFR and 88.2% (or $4.6 billion) were subject to LIBOR as the benchmark interest rate. In addition to credit spread, all-in yield includes the amortization of deferred origination fees, purchase price premium and discount if any, loan origination costs and accrual of both extension and exit fees. All-in yield for the total portfolio assumes the applicable floating benchmark interest rate as of June 30, 2022 for weighted average calculations.

(5)Extended maturity assumes all extension options are exercised by the borrower; provided, however, that the Company’s loans may be repaid prior to such date. As of June 30, 2022, based on the unpaid principal balance of the Company’s total loan exposure, 43.3% of the Company’s loans were subject to yield maintenance or other prepayment restrictions and 56.7% were open to repayment by the borrower without penalty.

The following tables present an overview of the Company’s loans held for investment portfolio by loan seniority (dollars in thousands):


	June 30, 2022
Loans held for investment, net	Outstanding principal		Unamortized premium (discount) and loan origination fees, net		Amortized cost
Senior loans	$	4,675,161	$	(8,751)	$	4,666,410
Subordinated and mezzanine loans	35,000		—		35,000
Total	$	4,710,161	$	(8,751)	$	4,701,410
Allowance for credit losses					(84,156)
Loans held for investment, net					$	4,617,254


	December 31, 2021
Loans held for investment, net	Outstanding principal		Unamortized premium (discount) and loan origination fees, net		Amortized cost
Senior loans	$	4,884,343	$	(10,101)	$	4,874,242
Subordinated and mezzanine loans	35,000		(40)		34,960
Total	$	4,919,343	$	(10,141)	$	4,909,202
Allowance for credit losses					(41,999)
Loans held for investment, net					$	4,867,203

For the six months ended June 30, 2022, the Company’s loans held for investment portfolio activity was as follows (dollars in thousands):



	Carrying value
Balance as of January 1, 2022	$	4,867,203
Additions during the period:
Loans originated	535,053
Additional fundings	58,558
Amortization of origination fees	3,627
Deductions during the period:
Collection of principal	(804,417)
Collection of accrued PIK interest	(613)


(Increase) of allowance for credit losses	(42,157)
Balance as of June 30, 2022	$	4,617,254

As of June 30, 2022 and December 31, 2021, there was $8.8 million and $10.1 million, respectively, of unamortized loan fees included in loans held for investment, net in the consolidated balance sheets. As of June 30, 2022 and December 31, 2021, there were no unamortized discounts included in loans held for investment at amortized cost on the consolidated balance sheets.

Loan Risk Ratings

The Company evaluates all of its loans to assign risk ratings on a quarterly basis on a 5-point scale. As described in Note 2, the Company’s loans are rated “1” through “5,” from least risk to greatest risk, respectively. The Company generally assigns a risk rating of “3” to all loan investments upon origination, except when specific circumstances warrant an exception.

The following tables present the Company's loans held for investment portfolio on an amortized cost basis by origination year, grouped by risk rating (dollars in thousands):


	June 30, 2022
	Amortized cost by origination year
	2022		2021		2020		2019		2018		Prior		Total
Senior loans by internal risk ratings:
1	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2	—		33,680		—		61,998		—		253,950		349,628
3	539,935		1,576,195		98,408		778,708		264,678		12,032		3,269,956
4	—		—		78,269		497,742		251,307		140,776		968,094
5	—		—		—		—		78,732		—		78,732
Total senior loans	$	539,935	$	1,609,875	$	176,677	$	1,338,448	$	594,717	$	406,758	$	4,666,410
Subordinated and mezzanine loans by internal risk ratings:
1	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2	—		—		—		—		—		—		—
3	—		—		—		35,000		—		—		35,000
4	—		—		—		—		—		—		—
5	—		—		—		—		—		—		—
Total subordinated and mezzanine loans	—		—		—		35,000		—		—		35,000
Total	$	539,935	$	1,609,875	$	176,677	$	1,373,448	$	594,717	$	406,758	$	4,701,410


	December 31, 2021
	Amortized cost by origination year
	2021		2020		2019		2018		2017		Prior		Total
Senior loans by internal risk ratings:
1	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2	33,621		—		82,461		242,614		168,355		—		527,051
3	1,600,659		95,858		1,400,670		407,509		169,934		17,163		3,691,793
4	—		78,013		154,093		183,750		216,542		—		632,398
5	—		—		—		23,000		—		—		23,000
Total senior loans	$	1,634,280	$	173,871	$	1,637,224	$	856,873	$	554,831	$	17,163	$	4,874,242
Subordinated and mezzanine loans by internal risk ratings:
1	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2	—		—		—		—		—		—		—
3	—		—		34,960		—		—		—		34,960
4	—		—		—		—		—		—		—
5	—		—		—		—		—		—		—
Total subordinated and mezzanine loans	—		—		34,960		—		—		—		34,960
Total	$	1,634,280	$	173,871	$	1,672,184	$	856,873	$	554,831	$	17,163	$	4,909,202

Loans acquired rather than originated are presented in the table above in the column corresponding to the year of origination, not acquisition.

The table below summarizes the Company’s loans held for investment portfolio on an amortized cost basis, by the results of its internal risk rating review process performed (dollars in thousands):


Risk rating	June 30, 2022		December 31, 2021
1	$	—	$	—
2	349,628		527,051
3	3,304,956		3,726,753
4	968,094		632,398
5	78,732		23,000
Total	$	4,701,410	$	4,909,202
Allowance for credit losses	(84,156)		(41,999)
Carrying value	$	4,617,254	$	4,867,203
Weighted average risk rating(1)	3.2		3.0

________________________________

(1)Weighted average risk rating calculated based on the amortized cost balance at period end.

The weighted average risk rating of the Company’s loans held for investment portfolio increased to 3.2 as of June 30, 2022 compared to 3.0 as of December 31, 2021.

Allowance for Credit Losses

The Company’s allowance for credit losses developed pursuant to ASC 326 reflects its current estimate of potential credit losses related to its loans held for investment portfolio as of June 30, 2022. As part of its allowance for credit losses, the Company maintains a separate allowance for credit losses related to unfunded loan commitments which is included in accrued expenses and other liabilities on the consolidated balance sheets. See Note 2 for additional details regarding the Company's accounting policies and estimation of its allowance for credit losses.

The following tables present activity in the allowance for credit losses for loans by finance receivable class (dollars in thousands):


	For the Three Months Ended June 30, 2022
	Senior loans		Subordinated and mezzanine loans		Total
Allowance for credit losses for loans held for investment:
Beginning balance at April 1, 2022	$	45,940	$	367	$	46,307
Allowance for (reversal of) credit losses, net	37,545		304		37,849
Subtotal	83,485		671		84,156

Allowance for credit losses on unfunded loan commitments:
Beginning balance at April 1, 2022	4,786		—		4,786
Allowance for (reversal of) credit losses, net	4,441		—		4,441
Subtotal	9,227		—		9,227
Total allowance for credit losses	$	92,712	$	671	$	93,383


	For the Three Months Ended June 30, 2021
	Senior loans		Subordinated and mezzanine loans		Total
Allowance for credit losses for loans held for investment:
Beginning balance at April 1, 2021	$	55,155	$	1,486	$	56,641
Allowance for (reversal of) credit losses, net	(3,724)		(976)		(4,700)
Subtotal	51,431		510		51,941

Allowance for credit losses on unfunded loan commitments:
Beginning balance at April 1, 2021	2,084		65		2,149
Allowance for (reversal of) credit losses, net	1,276		(54)		1,222
Subtotal	3,360		11		3,371
Total allowance for credit losses	$	54,791	$	521	$	55,312

	For the Six Months Ended June 30, 2022
	Senior loans		Subordinated and mezzanine loans		Total
Allowance for credit losses for loans held for investment:
Beginning balance at January 1, 2022	$	41,193	$	806	$	41,999
Allowance for (reversal of) credit losses, net	42,292		(135)		42,157
Subtotal	83,485		671		84,156

Allowance for credit losses on unfunded loan commitments:
Beginning balance at January 1, 2022	4,210		—		4,210
Allowance for (reversal of) credit losses, net	5,017		—		5,017
Subtotal	9,227		—		9,227
Total allowance for credit losses	$	92,712	$	671	$	93,383

	For the Six Months Ended June 30, 2021
	Senior loans		Subordinated and mezzanine loans		Total
Allowance for credit losses for loans held for investment:
Beginning balance at January 1, 2021	$	58,210	$	1,730	$	59,940
Allowance for (reversal of) credit losses, net	(6,779)		(1,220)		(7,999)
Subtotal	51,431		510		51,941

Allowance for credit losses on unfunded loan commitments:
Beginning balance at January 1, 2021	2,756		132		2,888
Allowance for (reversal of) credit losses, net	604		(121)		483
Subtotal	3,360		11		3,371
Total allowance for credit losses	$	54,791	$	521	$	55,312

The Company’s allowance for credit losses is influenced by the size and maturity dates of its loans, loan quality, credit indicators including risk ratings, delinquency status, historical loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.

During the three months ended June 30, 2022, the Company recorded an increase of $42.3 million to its allowance for credit losses. The increase to the Company's allowance for credit losses was due to weakening credit indicators, inflationary expectations, reduced liquidity in the capital markets, an uncertain macroeconomic outlook, and new loan originations offset by seven loan repayments in-full. The uncertain macroeconomic outlook is caused by surging inflationary pressures, rising short term interest rates, continuing supply chain disruptions, widening credit spreads in the fixed income markets, a material decline in U.S. stock market indices, and Russia’s invasion of Ukraine. These factors, and slowing business plan execution for certain of our loans, contributed to the increase in the Company’s allowance for credit losses during the three months ended June 30, 2022. While the ultimate impact of the macroeconomic outlook and property-level performance trends of the Company's loan portfolio remain uncertain, the Company's macroeconomic outlook is intended to address these uncertainties, and the Company has made specific forward-looking valuation adjustments to the inputs of its allowance for credit loss calculation to reflect the variability associated with the timing, strength, and breadth of a sustained economic recovery or the potential impact of an uncertain economic outlook that may result in a post-COVID environment.

During the six months ended June 30, 2022, the Company recorded an increase of $47.2 million, increasing its CECL reserve to $93.4 million as of June 30, 2022. For the six months ended June 30, 2022, the Company's estimate of expected credit losses was impacted by loan originations and repayments of $535.1 million and $804.4 million, respectively, and recessionary and recovery macroeconomic assumptions employed in determining the model-based general CECL reserve.

On June 30, 2022, the Company determined that one first mortgage loan secured by an office property met the CECL framework’s criteria for individual assessment. As of June 30, 2022, the loan was not on non-accrual status because all amounts of interest due were collected by the Company. The amortized cost of the loan was $55.7 million as of June 30, 2022, and December 31, 2021. Subsequent to June 30, 2022, the borrower failed to meet the loan's extension conditions and, as a result, the Company and borrower agreed to modify the loan agreement to facilitate an orderly disposition of the property by the borrower. Accordingly, the Company utilized the estimated fair value of the collateral to estimate a total allowance for credit losses of $11.1 million, which is included in its CECL reserve as of June 30, 2022. The Company’s fair market value estimate was determined using a discounted cash flow model and Level 3 inputs, which include estimates of property-specific cash flows over a specific holding period, a discount rate of 10.7%, and a terminal capitalization rate of 8.7%. These inputs are based on the location, type and nature of the property, current sales and lease comparables, anticipated market conditions, and management’s knowledge, experience and judgment.

During the three months ended June 30, 2021, the Company recorded a decrease of $3.5 million in the allowance for credit losses. The decline in the Company’s allowance for credit losses was primarily due to an improving macroeconomic outlook based on recent observed economic data, improved property performance of underlying collateral for many of its loan investments that were adversely impacted by COVID-19, and normalizing commercial real estate capital markets activity. During the six months ended June 30, 2021, the Company recorded a decrease of $7.5 million, reducing the total CECL reserve to $55.3 million as of June 30, 2021. For the six months ended June 30, 2021, the Company’s estimate of expected credit losses was impacted by loan originations, sales, and repayments of $631.4 million, $60.7 million, and $339.3 million, respectively, recessionary and recovery macroeconomic assumptions employed in determining the model-based general CECL reserve, and an increase in the Company’s total loan commitments and unpaid principal balance as of June 30, 2021.

One loan secured by a retail property was on non-accrual status as of June 30, 2022 and December 31, 2021 due to a default caused by non-payment of interest in December 2020. The amortized cost basis of the loan was $23.0 million as of June 30, 2022 and December 31, 2021. In accordance with the Company’s revenue recognition and allowance for credit losses accounting policies, the Company suspended its accrual of interest income when the loan was placed on non-accrual status and continues to believe that the carrying value of the loan is collectible as of June 30, 2022.

Loan Modification Activity

The Company may amend or modify a loan depending on the loan’s specific facts and circumstances. These loan modifications typically include additional time for the borrower to refinance or sell the collateral property, adjustment or waiver of performance tests that are prerequisite to the extension of a loan maturity, and/or deferral of scheduled principal payments. In exchange for a modification, the Company often receives a partial repayment of principal, a short-term accrual of PIK interest for a portion of interest due, a cash infusion to replenish interest or capital improvement reserves, termination of all or a portion of the remaining unfunded loan commitment, additional call protection, and/or an increase in the loan coupon. For the six months ended June 30, 2022, none of the Company’s loan modifications resulted in significant modifications.

As of June 30, 2022, the total amount of accrued PIK interest in the loans held for investment portfolio was $2.4 million with respect to three first mortgage loans.

The following table presents the accrued PIK interest activity for the six months ended June 30, 2022 for the Company’s loans held for investment portfolio (dollars in thousands):



	June 30, 2022
Balance as of January 1, 2022	$	3,028
Accrued PIK interest	—
Repayments of accrued PIK interest	(313)
Balance as of March 31, 2022	$	2,715
Accrued PIK interest	—
Repayments of accrued PIK interest	(300)
Write-off of accrued PIK interest	—
Balance as of June 30, 2022	$	2,415

No accrued PIK interest was recorded and deferred during the six months ended June 30, 2022.

As of June 30, 2022 and December 31, 2021, none of the Company's accrual status loans had accrued interest income receivable 90 days or more past due.

The following table presents an aging analysis for the Company’s loans held for investment portfolio, by class of loans on amortized cost basis (dollars in thousands):


			Days Outstanding as of June 30, 2022
	Current		Days: 30-59		Days: 60-89		Days: 90 or more		Total loans past due		Total loans
Loans receivable:
Senior loans	$	4,643,410	$	—	$	—	$	23,000	$	23,000	$	4,666,410
Subordinated and mezzanine loans	35,000		—		—		—		—		35,000
Total	$	4,678,410	$	—	$	—	$	23,000	$	23,000	$	4,701,410


			Days Outstanding as of December 31, 2021
	Current		Days: 30-59		Days: 60-89		Days: 90 or more		Total loans past due		Total loans
Loans receivable:
Senior loans	$	4,851,242	$	—	$	—	$	23,000	$	23,000	$	4,874,242
Subordinated and mezzanine loans	34,960		—		—		—		—		34,960
Total	$	4,886,202	$	—	$	—	$	23,000	$	23,000	$	4,909,202

First Mortgage Loan, Office Property

Accounts Notes And Loans Receivable [Line Items]

Total allowance for credit losses

$ 11,100,000

Real Estate

Accounts Notes And Loans Receivable [Line Items]

Discount rate (in percent)

10.70%

Terminal capitalization rate (in percent)

8.70%

Number of loans on non-accrual status | loan

Real Estate | First Mortgage Loan, Office Property

Accounts Notes And Loans Receivable [Line Items]

Loans held for investment, net

$ 44,600,000

Amortized cost of loan

55,700,000

$ 55,700,000

Total allowance for credit losses

11,100,000

Real Estate | Mortgage Loan, Retail Property

Accounts Notes And Loans Receivable [Line Items]

Amortized cost of loan

23,000,000

$ 23,000,000

23,000,000

Twelve Loan

Accounts Notes And Loans Receivable [Line Items]

Number of mortgage loans originated or acquired | loan

Total loan commitment

613,300,000

$ 613,300,000

Loans and leases receivable unpaid principal balance

537,300,000

Unfunded loan commitments

76,000,000

$ 76,000,000

Eight loan

Accounts Notes And Loans Receivable [Line Items]

Number of mortgage loans originated or acquired | loan

Loan repayment principal amount

$ (717,300,000)

Nine Loan

Accounts Notes And Loans Receivable [Line Items]

Number of mortgage loans originated or acquired | loan

Interest received in kind

$ (87,800,000)

Total loan repayments

(805,000,000)

Accrued Interest and Fees Receivable

Accounts Notes And Loans Receivable [Line Items]

Loans held for investment, net

13,500,000

$ 14,300,000

Accrued PIK interest

Accounts Notes And Loans Receivable [Line Items]

Loans held for investment, net

$ 2,400,000

Number of first mortgage loans held for investment | loan

[1]

The Company’s consolidated Total Assets and Total Liabilities as of June 30, 2022 include assets and liabilities of variable interest entities (“VIEs”) of $3.2 billion and $2.6 billion, respectively. The Company’s consolidated Total Assets and Total Liabilities as of December 31, 2021 include assets and liabilities of VIEs of $3.2 billion and $2.6 billion, respectively. These assets can be used only to satisfy obligations of the VIEs, and creditors of the VIEs have recourse only to these assets, and not to TPG RE Finance Trust, Inc. See Note 5 to the Consolidated Financial Statements for details.