Fortress Investment Group LLC (FIG)

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Fortress Investment Group LLC (FIG)

Q3 2013 Earnings Call

October 31, 2013 10:00 am ET

Executives

Gordon Runté

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

Daniel N. Bass - Chief Financial Officer

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

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

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

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

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

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

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

Presentation

Operator

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress Investment Third Quarter Earnings Call. [Operator Instructions].

I would now like to turn the call over to Gordon Runte, Director of Investor Relations. Please go ahead.

Gordon Runté

Okay. Thank you, Jessica. Good morning, everyone, and welcome to the Fortress Investment Group's third 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. And after these remarks, we will save most of our time this morning for your questions.

And joining us for that portion of our call, we have with us 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 senior management team.

So just a few housekeeping items before we begin today. Let me remind you that statements made today that are not historical facts maybe forward-looking statements. And 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 our annual filings.

With that, let me hand off, Randy.

Randal Alan Nardone

Thanks, Gordon, and thanks, everyone, for joining us. 3 quarters into 2013 and we're feeling very good about our prospects for the full year.

AUM of $58 billion is at an all-time high. Investment performance is strong across all businesses. Year-to-date, management fees and incentive income are up double- and triple-digits, respectively, over the last year. Unrecognized incentive income, which has not yet been reflected in earnings, rose to $800 million. And the value of cash and investments on our balance sheet grew to $1.6 billion.

For the third quarter, distributable earnings were $0.13 a share. Year-to-date, DE of $0.64 a share is well above full-year results in both 2011 and 2012. With a quarter to go, we're less than $0.10 a share away from delivering our strongest year of distributable earnings since our first year as a public company.

With today's dividend announcement, we've paid or committed $0.18 a share so far this year, the regular quarterly dividends. With 0 debt and strong performance year-to-date, we expect to have ample liquidity when our board considers opportunistic buybacks and a year-end top-up dividend. Of course, our results and prospects for distribution's all hinged on investment performance.

So let me start with a few highlights. In Credit PE, outstanding performance continued. And we have realizations leading to $17 million of incentive income for the quarter. This brings full-year realized incentive income in the business to over $100 million. Gross unrealized incentive is now over $600 million. So a great story in Credit PE.

Our main Credit Hedge Funds, DBSO, is also on pace for another outstanding year. With total NAV of $4.6 billion above performance threshold, DBSO had year-to-date net returns of approximately 14% through September. As in the Credit PE Funds, our Credit Hedge Funds have generated significant incentive income, $44 million for the quarter and over $140 million for the year, with value continuing to build on current NAV.

In Private Equity, main fund valuations increased by 10% in the third quarter and 17% year-to-date. That's over $2.7 billion in appreciation for the year. And we feel very good about our prospects for valuations looking ahead.

Part of our optimism stems from the fact that we have a lot of terrific portfolio companies. The most recent highlight is Springleaf Financial, a Fund V investment that completed its IPO in October. Its price as of yesterday's close imply the 12x return on an investment we made just 3 years ago. We haven't sold any Springleaf because we believe there's a great deal of value creation still to come. With Springleaf now public, nearly half the NAV in our Private Equity Funds is in public companies.

In our Liquid Markets business, our flagship Macro and Asia Macro Funds were up nearly 10% and 12% net, respectively, for the year through September. Both gave back some returns in the third quarter, which knocked about $0.05 off of DE. But even with the third quarter giveback, Liquid Markets has already generated $98 million of incentive income through October -- through September, sorry. And performance in both Macro and Asia Macro has turned positive again for October through the 25th.

At Logan Circle, steady strong returns have supported inception to-date performance above respective benchmarks for everyone of Logan 16 fixed-income strategies. As always, investment performance is a source of all good outcomes for our company including driving fundraising efforts.

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