Fortress Investment Group LLC (FIG)

FIG 
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Fortress Investment Group LLC (FIG)

Q2 2013 Earnings Call

August 01, 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 - Co-Chairman of the Board, President, Principal,Head of Credit & Real Estate Business and Member of Management/Organization Development Committee

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

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Danielle Matsumoto - Goldman Sachs Group Inc., Research Division

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Roger A. Freeman - Barclays Capital, Research Division

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

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

Daniel Thomas Fannon - Jefferies LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fortress Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Gordon Runté, Head of Investor Relations. You may begin.

Gordon Runté

Okay, thank you, Victoria. Good morning, everyone, and welcome to the Fortress Investment Group's Second Quarter 2013 Earnings Conference Call. We will begin our call today with opening remarks from Fortress Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. After these remarks, we will save most of our time for your questions.

Joining us for that portion of our call, we have in the room today co-Chairman and Head of Private Equity, Wes Edens; Principal and Head of Liquid Markets, Mike Novogratz; and the co-CIO of Credit, Dean Dakolias. We also have co-Chairman and Head of Credit Pete Briger, who has dialed in but on the move in Europe so we are hoping technology will be our friend with that connection.

Just a few housekeeping items before we begin. Let me remind you that statements made today that are not historical facts maybe forward-looking statements. These statements are, by their nature, uncertain and may differ materially from actual results. So 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. We had a great quarter and a great first half of the year.

Distributable earnings of $0.30 a share is our strongest quarter since our very first as a public company. At $0.51 a share for the first half of the year is only $0.01 shy of our DE for all of last year. We've spoken before about the potential of our business model when we start to run on all cylinders. This is what we meant. There are a lot of positives to cover today, but for the quarter it's really on about what strong investment performance means to our bottom line.

Here's a few key points. Our 3 alternatives businesses each generated incentive income in the second quarter. The total of nearly $200 million is our second highest ever. At the same time, gross unrealized incentive income rose to over $750 million, or $1.50 a share. We're set up well for the future. The incentive income comes from investment performance. With the hedge funds, it's the story of the 9s. Over 9% net returns in the second quarter in both our Macro and Asia Macro Funds. And over 9% net returns year-to-date for our Credit Hedge Funds. These performance led to liquid incentive income of over $90 million, which is nearly 3x Q1.

Credit Hedge Fund incentive income was over $60 million, nearly double Q1. With strong performance and new commitments, we ended the quarter with over $9.5 billion of hedge fund NAV above high watermarks.

In our Credit PE Funds, we had $37 million of incentive income in the quarter and $85 million year-to-date. That's more than we generated in all of 2012. In PE and the Castles, we generated about $6 million of incentive income. The Castle result is attributable to new residential, which we spun out of Newcastle in the quarter. Additionally, our unrealized incentive income includes almost $85 million in options value for the Castles. Our main PE Fund valuations increased by a couple of percent in the second quarter and 7% year-to-date, that's over $1 billion of appreciation for the year. Last 12 months, valuations are up almost 21%.

NAV is close to its all-time high and all main funds are above costs. There's still work to do but we expect to generate attractive returns in our main funds over time. While higher incentive income may be the centerpiece of our second quarter, here's some additional highlights. Our AUM was up approximately 14% from the second quarter last year. We're down slightly from the last quarter as a result of LP distributions and the restructuring of Eurocastle, but both of these were positive developments. Overall, we see a lot of potential for AUM growth given capital-raising activities across the firm.

We raised a total of nearly $3 billion in the first half of the year with about $1.6 billion in additional commitments in July, so $4.6 billion year-to-date. That includes our second MSR fund, which closed last week at it's cap of $1.1 billion. We're currently marketing 2 additional funds in private equity and infrastructure fund and a fund focused on nonperforming loans in Italy.

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