Fortress Investment Group LLC Q1 2010 Earnings Call Transcript

Fortress Investment Group LLC Q1 2010 Earnings Call Transcript
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Fortress Investment Group LLC (FIG)

Q1 2010 Earnings Call

May 06, 2010 10:00 am ET

Executives

Wesley Edens - Founding Principal, Co-Chairman and Chairman of Management Committee

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

Daniel Mudd - Chief Executive Officer, Director and Chairman of Nominating, Corporate Governance & Conflicts Committee

Lilly Donohue - Managing Director

Daniel Bass - Chief Financial Officer

Analysts

Craig Siegenthaler - Crédit Suisse First Boston, Inc.

Marc Irizarry - Goldman Sachs Group Inc.

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

Daniel Fannon - Jefferies & Company, Inc.

Roger Smith - Macquarie Research

Roger Freeman - Barclays Capital

Presentation

Operator

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Good morning, my name is Brooke, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress' First Quarter Earnings Conference Call. [Operator Instructions] Ms. Lilly Donohue, you may begin your conference.

Lilly Donohue

Thank you, Brooke. Good morning, everyone. I want to welcome all of you today May 6, 2010, to our first quarter earnings call. Joining me today is Dan Mudd, our CEO; Dan Bass, our Chief Financial Officer; and we also have with us Wes Edens, and Pete Briger.

I'd like to point out that statements today, which are not historical facts may be forward-looking statements. Our actual results may differ materially from the estimates or expectations in any forward looking statement. These statements represent Fortress' beliefs regarding events by their nature are uncertain and outside of our control. I would encourage you to review the forward-looking statement disclaimer in our quarterly earnings release, including the recommendation to review the risk factors, which are contained in our annual and quarterly reports that are filed with the SEC, which is also available on our newly redesigned website at www.fortress.com.

Our new website is the product of an ongoing effort here at Fortress to look at our disclosures, improve communication and transparency and to simply tell the Fortress story. We really appreciate the feedback from the analyst community as well as our shareholders and hope you will find it helpful. With that, I'd like to turn over the call to Dan Mudd. Dan?

Daniel Mudd

Thanks, Lilly, good morning, everybody, and thanks for joining us today. The first quarter continued a trend of steady improvement. Pretax DE was $96 million, which was up significantly from the $9 million we made in the first quarter of '09, and up from the $1 million in the fourth quarter. The primary drivers there are positive performance in the managed funds, realizations in our credit business that generated significant incentive income and improvement on our balance sheet investments.

We're pleased by the positive momentum and the performance and the opportunities, but we also recognize that we have more to do. And above all else, we continue to stay focused on delivering top-tier performance to our fund investors, who are the foundation of our business. This morning, I'm going to spend a few minutes on the markets, review the key financial metrics, summarize activities in the individual business units and then Dan Bass will go through the financial results in detail, then we'll spend the bulk of time on your questions.

So as to the market in the first quarter of 2010, the economy continued to heal. Equity markets advanced and they sold off slightly in January and early February. The S&P 500 posted a first quarter return of over 5%, which brought the 12 months trailing to about 50%. Similarly, the international equity markets also posted gains on the fixed income side. High yield bonds continue to be the best performing sector, where new issuances totaled approximately $70 billion, as investor demand remained high.

The market's performance reflect the stronger earnings, some stabilization in the labor and the housing markets continuing benign inflation and some degree improvement in consumer confidence. We agree that these markets are improving, but we expect as we've talked about in the last couple of calls, continued surprises and bumps along the way whether Greece, or whether Iceland or whether other things like that.

But we are encouraged in all that by the way that the markets are shaping up and aligning with the foundational strengths of what Fortress does as a company. I say that because the directionality with dispersion, some inconsistency between markets creates a terrific climate for our global macro business. Restructuring and deleveraging produces opportunities for our credit business to find and profit from special situations. And the eventual reordering of company strategies in capital structures should produce a classic private equity market.

In addition, we're finding that as investors look to allocate capital in a low interest rate environment, loan-only credit is also an attractive portfolio allocation. And that sets up well for our newest business Logan Circle Partners. So in short, having survived the past two years, we've come out stronger with businesses that are well-positioned to capitalize on, I think what we all see, as truly historic opportunities.

Let's go through the three levers that build value at Fortress performance, capital formation and business development. First on the performance side, assets under management, which refers to the amount on which we earn management fees is now at $41.6 billion, which reflects the numbers for the Logan Circle acquisition at about $11.4 billion of AUM.

As I mentioned earlier, pretax distributable earnings was $96 million for the first quarter, up from $9 million in the first quarter of '09. That quarterly Pretax DE result was quite strong, principally driven by incentive income in our credit business of about $85 million gross for the quarter.

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