Fortress Investment Group LLC (FIG)

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Fortress Investment Group LLC (FIG)

Q4 2010 Earnings Call

March 01, 2011 8:30 am ET

Executives

Wesley Edens - Co-Founder, Co-Chairman, Principal and Member of Management Committee

Peter Briger - Co-Chairman, Principal and Member of Management Committee

Gordon Runté -

Daniel Bass - Chief Financial Officer

Daniel Mudd - Chief Executive Officer, Director and Member of Management Committee

Analysts

Craig Siegenthaler - Crédit Suisse AG

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

Marc Irizarry - Goldman Sachs Group Inc.

Roger Smith - Macquarie Research

Roger Freeman - Barclays Capital

Presentation

Operator

Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress fourth quarter and year end earnings conference call. [Operator Instructions] Thank you, I'll now turn the conference over to Gordon Runté. Please go ahead, sir.

Gordon Runté

Thank you, Wes. Good morning, everyone, and welcome to our Fourth quarter and Full Year 2010 Earnings Conference Call. We will begin our call with opening remarks from Fortress Chief Executive Officer, Dan Mudd; and Chief Financial Officer, Dan Bass. After these remarks, we'll save most of our time today for your questions. And we have Pete with us here and Wes, Mike, Adam and others connected to join us for that.

Before we begin, let me remind you that statements made today that are not historical facts may be forward-looking statements. Such statements are, by their nature, uncertain and may differ materially from actual results. We encourage you to read the forward-looking statements 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 Dan Mudd. Dan?

Daniel Mudd

Okay. Thanks, Gordon, and thanks, everybody, for joining us today. The fourth quarter, I think, was a strong finish to a solid year at Fortress. Our funds delivered top-tier results for our investors. Fee income and expenses were steady all year. Assets under management grew in every segment. And $145 million of incentive income in the fourth quarter produced full year distributable earnings of $372 million on revenues of $840 million. So a short tagline, I think, is that we built momentum across the company.

We entered, as you might recall, 2010 with five major corporate priorities: improved financial performance, investment performance, increased capital-raising momentum, build out our platform and strengthen our balance sheet. So let me begin with a scorecard on 2010.

First, financial performance. Full-year pre-tax DE of $372 million tripled our results from 2009. Second, fund investment performance. In our Macro Funds, performance was top-tier, nearly 11% net. In Credit, our flagship Drawbridge Special Opportunities Fund delivered returns of over 25% net. In our first Credit Opportunities Fund, inception to date returns were over 30% on an annual basis. And our PE Fund Investments appreciated 17% over the course of the year.

Third priority, capital raising. 2010 capital commitments came in at $5.3 billion, which was over 3x the capital raised in 2009. Fourth, expanding our platform and our geographic presence. Since our last call, our Singapore office has become fully operational, which complements our existing global presence in the U.S., Europe, Japan and Australia. So we are raising and investing capital in each of these locations today.

And fifth, strengthening our balance sheet. Total debt is now $278 million, down 65% from its peak of $800 million. We paid down an additional $120 million in principal over the course of the year.

So that's the high-level scorecard. Let me add a little bit of detail. Pretax distributable earnings for the fourth quarter were $125 million, or $0.24 a share. That's the highest DE that we have recorded since the second quarter of '07. Full year pretax DE of $372 million was $0.72 a share. That compares to $126 million or $0.26 a share in 2009.

As we've noted, the primary driver of our strong results for the quarter and thus the year was a substantial increase in incentive income during the quarter. We recognized incentive income in all alternative segments for the first time since 2007. So for the full year, incentive income was $369 million versus the $75 million recorded in '09.

Investment performance is of course a result of the -- incentive income is of course the result of underlying fund performance, which was strong across the franchise. In Liquid Markets, the strong macro returns I mentioned put us squarely in the top tier of peer performance for the year, and virtually 100% of our main fund NAV was above high water marks at year end.

We estimate that our Macro main fund had positive returns through the first weeks of February. We gave some back last week, recovered a bit, but we still are committed in our strong centrals thesis: long Asia, shallow U.S. recovery, slow move to higher rates in the developed world is valid.

In the Fortress Commodities Fund, net returns were approximately 2% in 2010, and with approximately 94% of NAV in that $1 billion or so fund above high water marks, the ongoing market opportunity is driving investor interest. And we think the fund is well positioned to generate incentive income this year.

In the Credit Hedge Funds, our DBSO main funds delivered exceptional full year returns, ranging from 25% to 30%. In our private -- in our Credit Private Equity Funds, net asset value surpluses increased to $2.3 billion as of the end of the year, up over 20% compared to the third quarter. Our first Credit Opportunities Fund, FCO 1, had a net 2010 return of 40%. The second Credit Opportunities Fund returned 34%. These are spectacular numbers and reflect a terrific match between the opportunity set and the core capabilities of our credit team.

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