Fortress Investment Group LLC's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Fortress Investment Group LLC (FIG)

Q1 2012 Earnings Call

May 03, 2012 8:30 am ET


Gordon Runté -

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

Daniel N. Bass - Chief Financial Officer

Peter Lionel Briger - Co-Chairman, President, Director, Member of Management/Organization Development Committee, and Principal

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


Craig Siegenthaler - Crédit Suisse AG, Research Division

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

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

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Jason Stewart - Compass Point Research & Trading, LLC, Research Division

Roger A. Freeman - Barclays Capital, Research Division

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



Good morning. My name is Brooke, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fortress First Quarter Earnings Conference Call. [Operator Instructions] Mr. Gordon Runté, you may begin your conference.

Gordon Runté

Thank you, Brooke. Good morning, everyone, and welcome to the Fortress Investment Group First Quarter 2012 Earnings Conference Call. We will begin our call today with opening remarks from Fortress Interim Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. After these remarks, we'll save most of our time this morning for your questions. And joining us for that portion of our call, we have Co-Chairman and Head of Private Equity, Wes Edens; Co-Chairman and Head of Credit, Pete Briger; Principal and Co-CIO of Fortress Macro Funds, Mike Novogratz; and Co-CIO of Credit, Dean Dakolias; along with other members of our management team.

Before we begin, let me remind you that statements made today that are not historical facts may be forward-looking statements. And 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. Let me pick up where I left off from our last earnings call just 2 months ago. I described positive momentum on a number of fronts: capital formation, investment performance and the growing embedded value on our balance sheet and in our funds. I indicated that this momentum was carrying into 2012, and that's exactly what we saw during the first quarter. Reflecting confidence in our prospects going forward, the board approved a dividend payout of $0.05 a share for the first quarter. As a reminder, we intend to pay a base dividend in each quarter.

Beginning this year, we intend to supplement the fourth quarter dividend with a top-up dividend based on full year performance. Our base quarterly dividend represents a dividend yield of over 5%.

Let me recap some of the other key items from the first quarter and provide color on what we anticipate for the rest of the year. We generated pretax distributable earnings of $57 million or $0.11 a share in the first quarter. Dan will provide more detail in a few minutes, but let me highlight a few points.

First, our business was designed to provide a stable, predictable stream of management fees with the majority of AUM in long-term investment structures. This was the case in the first quarter with management fees of $118 million, roughly flat to Q4. Our $6.4 billion in dry powder, plus the commitments to be raised in funds still in the market, together with the permanent capital that can be raised through new capital, all point to potential to grow this base of earnings.

Second, our business generates variable incentive fees based on performance and realizations. Incentive income of $52 million was up slightly from Q4. We made progress during the quarter towards generating potential future incentive income with improved performance in Macro and continued valuation gains in Private Equity. Credit remains positioned to be a meaningful contributor to the incentive line with all main fund NAV above the high watermarks or preferred thresholds. In the end, our incentive income is less predictable than management fees, but as we've seen in past periods, it can be a meaningful contributor to DE.

The big news of the quarter, though, is capital formation. We had $2.9 billion in new capital commitments in the first quarter, our largest single quarter capital raised since 2008. That doesn't include $2.3 billion in net inflows at Logan Circle. These commitments came from approximately 150 investors, and we've continued to see 2 important trends in our LP base.

First, the base of expanding and becoming more diverse. Over 30% of our first quarter commitments came from new investors, and over 30% came from international investors. Second, we continue to deepen relationships with existing investors who accounted for the major portion of commitments. Approximately half of our AUM today is from LPs invested in 2 or more of our businesses.

The largest driver of the new commitments was our next-generation Credit Opportunities Fund, FCO III. The fund raised over $3.7 billion through the end of the quarter. That compares to $2.3 billion for FCO II, which was raised in 2009.

Also in Credit, our second Japan Opportunities Fund and our first dedicated global real estate fund accounted for nearly $1 billion of commitments through March. These funds highlight a dynamic I addressed on our last call, a growing LP preference for more focused strategies. At Fortress, we've had the benefit of being able to launch focused strategies based on expertise incubated within our main investment platforms.

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