Press Release

Fortress Reports Second Quarter 2017 Results

Company Release - 8/3/2017 8:03 AM ET

NEW YORK--(BUSINESS WIRE)-- Fortress Investment Group LLC (NYSE:FIG) (“Fortress” or the “Company”) today reported its second quarter 2017 financial results.

FINANCIAL SUMMARY

  • Management Fee Paying Assets Under Management (“AUM”) of $72.4 billion as of June 30, 2017, up 3% compared to the previous quarter
  • GAAP net income of $32 million, or $0.06 per diluted Class A share, for the second quarter of 2017, compared to a GAAP net loss of $27 million, or a $0.07 loss per diluted Class A share, for the second quarter of 2016
  • GAAP net income of $25 million, or $0.05 per diluted Class A share, for the first half of 2017, compared to a GAAP net loss of $43 million, or a $0.11 loss per diluted Class A share, for the first half of 2016
  • Pre-tax distributable earnings (“DE”) of $86 million, or $0.22 per dividend paying share, for the second quarter of 2017, compared to pre-tax DE of $101 million, or $0.26 per dividend paying share, for the second quarter of 2016
  • Pre-tax DE of $160 million, or $0.40 per dividend paying share, for the first half of 2017, compared to pre-tax DE of $165 million, or $0.42 per dividend paying share, for the first half of 2016
  • Net cash and investments of $1.0 billion, or $2.55 per dividend paying share, as of June 30, 2017
  • $1.4 billion of gross embedded incentive income across funds and permanent capital vehicles as of June 30, 2017, that has not yet been recognized in DE
  • Total uncalled capital, or “dry powder,” of $7.5 billion as of June 30, 2017, including $4.5 billion available for general investment purposes

BUSINESS HIGHLIGHTS

  • Raised $1.6 billion of capital across alternative investment businesses in the first half of 2017
  • Investment performance summary as of June 30, 2017:
    • Annualized inception-to-date net IRRs for Credit Opportunities Fund (“FCO”), FCO II and FCO III of 23.1%, 15.9% and 10.5%, respectively
    • Second quarter 2017 net returns of 1.2% for the Drawbridge Special Opportunities Fund (“DBSO”) LP
    • 14 of 16 Logan Circle strategies outperformed respective benchmarks in the second quarter of 2017
  • Post quarter end, Fortress announced that it had entered into a definitive agreement pursuant to which it will sell Logan Circle Partners, L.P. (“Logan Circle”) to MetLife, Inc. (NYSE: MET) (“MetLife”) for approximately $250 million

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Note: This release contains certain Non-GAAP financial measures. Fortress urges you to read the “Non-GAAP Information” section below and to review the exhibits in this release for reconciliations of these measures to the comparable GAAP measures.
 

PROPOSED ACQUISITION BY SOFTBANK

On July 12, 2017, Fortress announced that, at its special meeting of shareholders, the Company’s shareholders had voted, among other things, in favor of the proposal to adopt the previously announced merger agreement pursuant to which certain subsidiaries of SoftBank Group Corp. (“SoftBank”) will acquire Fortress for approximately $3.3 billion in cash. Of the votes cast in respect of the proposal to adopt the merger agreement, approximately 99.7% of shares voted in favor. The transaction is anticipated to close in the second half of 2017, subject to certain regulatory approvals and other customary closing conditions, after which Fortress will operate as an independent business within SoftBank under the continuing leadership of Fortress Principals Pete Briger, Wes Edens and Randy Nardone.

SUMMARY FINANCIAL RESULTS

Fortress’s business model is highly diversified, and management believes that this positions the Company to capitalize on opportunities for investing, capital formation and harvesting profits that can occur at different points in any cycle for our individual businesses. Fortress’s business model generates stable and predictable management fees, which is a function of the majority of Fortress’s alternative AUM residing in long-term investment structures. Fortress’s alternative investment businesses also generate variable incentive income based on performance, and this incentive income can contribute meaningfully to financial results. Balance sheet investments represent a third component of Fortress’s business model, and the Company has built substantial value in these investments, which are made in Fortress funds alongside the funds’ limited partners. The table below summarizes Fortress’s operating results for the three months ended June 30, 2017. The condensed consolidated GAAP statement of operations and balance sheet are presented on pages 10-11 of this press release.

                 
2Q 1Q 2Q % Change 1H 1H % Change
2017 2017 2016 QoQ   YoY 2017 2016 QoQ
(in millions, except per share amount)
GAAP
Revenues $ 247 $ 232 $ 232 6% 6% $ 479 $ 464 3%
Expenses 210 241 238 (13)% (12)% 451 445 1%
Other Income (loss) 8 1 (17 ) N/A N/A 9 (57 ) N/A
Net income (loss) 32 (7 ) (27 ) N/A N/A 25 (43 ) N/A
Net income (loss) attributable to Class A Shareholders   15   (3 )   (14 ) N/A N/A   11   (23 ) N/A
Per diluted share $ 0.06 $ (0.02 ) $ (0.07 ) N/A N/A $ 0.05 $ (0.11 ) N/A
Weighted average Class A shares outstanding, diluted 395 220 217 394 219
 
Distributable Earnings
Fund management DE $ 82 $ 61 $ 98 34% (16)% $ 143 $ 161 (11)%
Pre-tax DE   86   74     101   16% (15)%   160   165   (3)%
Per dividend paying share/unit $ 0.22 $ 0.19   $ 0.26   16% (15)% $ 0.40 $ 0.42   (5)%
Weighted average dividend paying shares and units outstanding 397 397 394 397 396
 
Assets Under Management
Private Equity and Permanent Capital $ 14,682 $ 14,511 $ 13,284 1% 11% $ 14,682 $ 13,284 11%
Credit1 17,708 17,731 18,209 0% (3)% 17,708 18,209 (3)%
Liquid Markets2 4,558 4,198 4,622 9% (1)% 4,558 4,622 (1)%
Logan Circle   35,483   33,719     34,080   5% 4%   35,483   34,080   4%
Total Assets Under Management $ 72,431 $ 70,159   $ 70,195   3% 3% $ 72,431 $ 70,195   3%
 

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1

The Assets Under Management presented for Credit includes $1,433 million of AUM related to co-managed funds as of 2Q 2017.
2 The Assets Under Management presented for Liquid Markets includes $4,516 million of AUM related to the Affiliated Manager as of 2Q 2017.
 

GAAP RESULTS

Fortress recorded GAAP net income of $32 million, or $0.06 per diluted Class A share, for the second quarter of 2017, compared to a GAAP net loss of $27 million, or a $0.07 loss per diluted Class A share, for the second quarter of 2016. Our diluted earnings per share includes the income tax effects to net income (loss) attributable to Class A shareholders from the assumed conversion of Fortress Operating Group units to Class A shares in periods when the effect is dilutive.

The year-over-year change in Fortress’s second quarter 2017 GAAP net income was primarily driven by a $29 million decrease in expenses, a $25 million increase in other income and a $14 million increase in revenues.

The $29 million decrease in expenses was primarily related to lower compensation and benefits expense.

The $25 million increase in other income was primarily due to higher net earnings from equity method investees, primarily with respect to investments in our private equity funds. These increases in other income were partially offset by net realized and unrealized losses in the fair value of our direct investments, including options and common stock held in our publicly traded private equity portfolio companies in the second quarter of 2017.

The $14 million increase in revenues was primarily related to higher incentive income from affiliates, partially offset by lower management fees from affiliates and incentive income from non-affiliates.

SEGMENT RESULTS (NON-GAAP)

This section provides information about each of Fortress’s businesses: (i) Credit Hedge Funds and Credit PE Funds, (ii) Private Equity Funds and Permanent Capital Vehicles, (iii) Liquid Hedge Funds, and (iv) Logan Circle. Fortress uses DE as the primary metric to manage its businesses and gauge the Company’s performance, and it uses DE exclusively to report segment results. All DE figures are presented on a pre-tax basis. Consolidated segment results are non-GAAP information and are not presented as a substitute for Fortress’s GAAP results. Fortress urges you to read “Non-GAAP Information” below.

               
As of June 30, 2017
  Private Equity Credit Funds

 

 

(in millions) Total Funds

Permanent
Capital Vehicles

  Hedge Funds   PE Funds

Liquid Hedge
Funds

Logan Circle
Partners

 
Assets Under Management3 $ 72,431 $ 6,850 $ 7,832 $ 8,310 $ 9,398 $ 4,558 $ 35,483
Dry Powder $ 7,491 $ 677 $ - $ 322 $ 6,492 N/A N/A
Average Management Fee Rate4 1.2 % 1.5 % 2.0 % 1.3 % 1.1 % 0.2 %
 
Incentive Eligible NAV Above Incentive Income Threshold5 $ 24,641 $ 2,042 $ 5,903 $ 5,927 $ 10,225 $ - $ 544
 
Undistributed Incentive Income: Unrecognized $ 1,385 $ 254 $ 37 $ 67 $ 1,026 $ 1 $ -
Undistributed Incentive Income: Recognized $ 46     -     7     39     -     -     -  
Undistributed Incentive Income6 $ 1,431   $ 254   $ 44   $ 106   $ 1,026   $ 1   $ -  
 
Three Months Ended June 30, 2017
Private Equity