Fortress Investment Group LLC (FIG)

FIG 
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Fortress Investment Group LLC (FIG)

Q4 2012 Earnings Call

February 27, 2013 10:00 am ET

Executives

Gordon Runté

Randal Alan Nardone - Co-Founder, Interim Chief Executive Officer, Principal and Director

Daniel N. Bass - Chief Financial Officer

Peter Lionel Briger - President, Principal, Head of Credit and Real Estate Business, Co-Chairman of the Board and Member of Management/Organization Development Committee

Wesley Robert Edens - Co-Founder, Principal, Director, Co-Chairman of the Board, Private Equity Chief Investment Officer and Member of Management Committee

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Gerald E. O'Hara - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress year-end conference call. [Operator Instructions] It is now my pleasure to hand the program over to Mr. Gordon Runté. Please go ahead.

Gordon Runté

Okay. Thank you, Christie. Good morning, everyone, and welcome to the Fortress Investment Group Fourth Quarter and Full Year 2012 Earnings Conference Call. We'll begin our call today with opening remarks from Fortress Interim Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. And after these remarks, we'll save most of our time this morning for your questions.

Joining us for that portion of our call, we have co-Chairman and Head of Credit, Pete Briger; co-Chairman and Head of Private Equity, Wes Edens; Principal and Head of Liquid Markets, Mike Novogratz, along with other members of our management team.

Before we begin, I'd like to point out that we posted a new investor presentation to our website 2 weeks ago. This presentation addresses many of the business dynamics and initiatives that we'll be discussing this morning. And I believe it goes a long way towards simplifying the Fortress story and our value proposition. We'll be posting an updated presentation with fourth quarter numbers, which we encourage you to review. Of course, we value your feedback on how we can further improve our materials, so please contact me directly with any thoughts on that.

Just a few housekeeping items before we begin. Let me remind you that statements made today that are not historical facts may be forward-looking statements. These statements are, by their nature, uncertain and may differ materially from actual results. We encourage you to read the forward-looking statement disclaimer in today's earnings release in addition to the risk factors described in our quarterly and annual filings.

With that, let me hand off to Randy.

Randal Alan Nardone

Thanks, Gordon, and thanks, everyone, for joining us today. We went into 2012 with high expectations and aggressive objectives for investment performance, for capital raising, for building further on the scope and reach of our business and for delivering strong financial results and creating value for our shareholders. I'd say we met those objectives. And we finished strong with pretax distributable earnings of $107 million in the fourth quarter. That's our highest quarter of DE in the last 2 years. This performance reflects strength across all of our businesses. We believe it's only an indication of what this company can deliver and we're firing on all cylinders. And we had a good start to 2013. If we can multiply by 6 the results of the first 2 months of the year, we'll have a very good year.

Here's the highlights for 2012. Our AUM increased to over $53 billion, an all-time high. In our alternatives businesses, we raised over $1.5 billion of capital in the fourth quarter and over $6.5 billion for the year. That's more than we've raised in any year since the financial crisis. On top of that, we had almost $6 billion in net flows at Logan Circle, our fixed income manager. We delivered strong investment performance in all of our businesses. Our main credit and Macro Funds were up each nearly 18% net for the year. Asia Macro topped 21%. Investment valuations rose by over 25% in Private Equity and Logan Circle continued to outperform benchmarks in virtually all strategies.

Looking at our balance sheet, net cash and investments reached almost $2.50 a share, or approximately 40% of our share price today. With strong capital raising and expectations for further growth in AUM, we have visibility of higher management fees going forward, which I'll get to in a minute. This provided the basis for a 20% increase in our regular quarterly dividend to $0.06 a share. The increase is effective for the fourth quarter of 2012, bringing distributions for the year to $0.21 in total. A pro forma $0.24 for base dividends in 2013 represents a dividend yield of approximately 4%. As you know, we invested $180 million in December to repurchase about 10% of our outstanding shares. The purchase price of $3.50 was nearly a 20% discount at the time and about a 40% discount today. At a cost of about $0.36 a share, we paid out more than our DE for the year with this transaction plus our regular dividends.

Looking more closely at our financial results, our fourth quarter management fees were $131 million, up from $121 million in the third quarter. With anticipated growth in AUM, we expect to see a corresponding increase in management fees going forward.

Let me give some color on the key drivers here. We're in the market raising additional capital in every Fortress business. In just the first 2 months of 2013, we've raised over $1.5 billion in new alternative capital, so a very strong start to the year. Nearly half of that was permanent equity raised by Newcastle. Wes is here and he could talk about how we think about opportunities for permanent capital and sector-specific funds in a few minutes. AUM rose by over 50% to nearly $21 billion at Logan Circle, leading to a 60% increase in management fees. Logan's investment performance and pipeline remain strong. The platform is highly scalable. Our expectations for business growth here are high and we're getting closer to our goal of Logan becoming a meaningful contributor.

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