Fortress Reports First Quarter 2008 Financial Results
Company Release - 5/8/2008 9:00 AM EDT
NEW YORK, May 8 /PRNewswire-FirstCall/ -- Fortress Investment Group LLC (NYSE: FIG) today reported its results for the first quarter ended March 31, 2008.
First Quarter 2008
For the quarter ended March 31, 2008, our GAAP net loss was $69 million, or $0.74 per diluted share. Excluding principals agreement compensation, first quarter GAAP net loss was $14 million.
Pre-tax distributable earnings for the quarter were $58 million, or $0.13 per dividend paying share, versus $220 million for the first quarter 2007.
For reconciliations from pre-tax distributable earnings and fund management DE to GAAP net income (loss), and from GAAP net income (loss) excluding principals agreement compensation to GAAP net income (loss) see "Reconciliation of Fund Management DE to Pre-tax Distributable Earnings and GAAP Net Income (Loss)" and "Reconciliation of GAAP Net Income (Loss) Excluding Principals Agreement Compensation to GAAP Net Income (Loss)" in this release. Distributable earnings and distributable earnings per dividend paying share are supplemental measures of our operating performance that we believe provide a meaningful basis for comparison between present and future periods(2).
The Company's quarterly segment revenues and distributable earnings will fluctuate materially depending upon the performance of our funds and the realization of events within our private equity business, as well as other factors. Accordingly, the revenues and profits in any particular quarter should not be expected to be indicative of future results. Quarterly dividends are not necessarily representative of the Company's earnings in the current quarter.
The following discussion of our results is based on segment reporting as presented in our Quarterly Report on Form 10-Q. Our GAAP statement of operations and balance sheet are presented following this discussion. The following table is a summary presentation of our segment performance with supplemental data provided for informational purposes. For a reconciliation of our segment results to the corresponding GAAP data, see the reconciliation information included later in this release.
1. Assets under management in this press release refers to management fee paying assets under management. 2. Comparisons of after tax or per share amounts to periods prior to our reorganization, including the first quarter of 2007 (prior to January 17), may not be meaningful because of the impact of the reorganization transactions on our financial statements. Supplemental Data for Three Months: Three Months Ended March 31, 2008 Private Equity Hedge Funds Principal (in millions) Total Funds Castles Liquid Hybrid Investments AUM AUM - January 1, 2008 $33,234 $13,278 $3,328 $8,128 $8,500 $- New capital raised, increase in invested capital 2,672 628 - 1,286 758 - Realizations (PE) / Redemptions (Hedge Funds) (843) (140) - (110) (593) - +/- Net Asset Value & Foreign Exchange rate change (876) (773) 175 (50) (228) - AUM - Ending Balance $34,187 $12,993 $3,503 $9,254 $8,437 $- Segment Revenues Management fee $145 $42 $13 $53 $37 $- Incentive income 32 29 - 3 - - Total 177 71 13 56 37 - Segment Expenses Profit sharing compensation expenses (32) (12) (1) (17) (2) - Operating expenses (74) (9) (8) (24) (33) - Unallocated Expenses - Total (106) (21) (9) (41) (35) - Fund Management DE 71 50 4 15 2 - Investment Income (3) Interest Expense (10) Pre-tax Distributable Earnings $58 $50 $4 $15 $2 $(13) Weighted Average Dividend Paying Shares and Units Outstanding 431 Three Months Ended March 31, 2007 Private Equity Hedge Funds Principal (in millions) Total Funds Castles Liquid Hybrid Investments AUM AUM - January 1, 2007 $20,853 $7,539 $2,842 $5,022 $5,450 $- New capital raised, increase in invested capital 2,967 1,570 125 752 520 - Realizations (PE) / Redemptions (Hedge Funds) (771) (691) - (36) (44) - Net Asset Value & Foreign Exchange rate change 377 (20) - 177 220 - AUM - Ending Balance $23,426 $8,398 $2,967 $5,915 $6,146 $- Segment Revenues Management fee $98 $27 $11 $31 $29 $- Incentive income 285 190 4 45 46 - Total 383 217 15 76 75 - Segment Expenses Profit sharing compensation expenses (123) (72) (2) (29) (20) - Operating expenses (54) (6) (7) (17) (24) - Unallocated Expenses (3) Total (180) (78) (9) (46) (44) - Fund Management DE 203 139 6 30 31 - Investment Income 29 Interest Expense (12) Pre-tax Distributable Earnings $220 $139 $6 $30 $31 $17 Weighted Average Dividend Paying Shares and Units Outstanding 403 Overview
We manage $34.2 billion of assets in private equity funds and hedge funds as of March 31, 2008. Fortress's revenues consist of (i) management fees, which are based on the size of our funds, (ii) incentive income, which is based on the performance of our funds, and (iii) investment income, which is based on our principal investments.
In the first quarter of 2008, we generated total segment revenues of $177 million, which included management fees of $145 million and incentive income of $32 million. After segment expenses and principal investments, Fortress generated pre-tax distributable earnings of $58 million for the quarter ended March 31, 2008.
For the quarter ended March 31, 2008, the private equity segments accounted for approximately 47% of total segment revenues and the hedge fund segments accounted for approximately 53% of total segment revenues.
For the quarter ended March 31, 2008, the private equity and hedge fund businesses accounted for approximately 76% and 24%, respectively, of total fund management DE.
Private Equity - Funds
For the quarter ended March 31, 2008, the Company's private equity funds generated $50 million of pre-tax distributable earnings as compared to $139 million for the quarter ended March 31, 2007.
Assets under management as of March 31, 2008 increased 55% to $13.0 billion from $8.4 billion as of March 31, 2007.
We received an incentive income distribution of $17 million, net of employee allocations. One measure of our ability to continue to generate incentive income is our unrealized gains in our private equity funds. Unrealized gains in our funds' public company holdings totaled $765 million as of March 31, 2008. As of March 31, 2008, our funds' private equity capital invested in non-public transactions totaled approximately $10.9 billion, and our private equity funds' unfunded commitments were approximately $2.4 billion.
Private Equity - Castles
For the quarter ended March 31, 2008, the Company's Castles generated $4 million of pre-tax distributable earnings as compared to $6 million for the quarter ended March 31, 2007.
Assets under management increased 18% to $3.5 billion as of March 31, 2008 from $3.0 billion as of March 31, 2007.
The Castles had an FFO loss of 3.1% for the three months ended March 31, 2008.
Liquid Hedge Funds
For the quarter ended March 31, 2008, the Company's liquid hedge fund business generated $15 million of pre-tax distributable earnings as compared to $30 million for the quarter ended March 31, 2007.
Assets under management increased 56% to $9.3 billion as of March 31, 2008 from $5.9 billion as of March 31, 2007.
The liquid hedge funds' gross return was 0.40%(3) for the three months ended March 31, 2008. The liquid hedge funds' gross return estimate for April was 2.36%, for a year to date gross return estimate of 2.76%.
Hybrid Hedge Funds
For the quarter ended March 31, 2008, the Company's hybrid hedge fund business generated $2 million of pre-tax distributable earnings as compared to $31 million for the quarter ended March 31, 2007.
Assets under management increased 37% to $8.4 billion as of March 31, 2008 from $6.1 billion as of March 31, 2007.
The hybrid hedge funds' gross return was -1.85%(3) for the three months ended March 31, 2008.
At March 31, 2008, we had $1.0 billion of assets (excluding $0.4 billion of cash and cash equivalents) in our principal investments segment, up from $0.7 billion (excluding $0.3 billion of cash and cash equivalents) at March 31, 2007. During the three months ended March 31, 2008, we increased our commitments to our principal investments by $112 million and funded $69 million of our commitments. We had $177 million of unfunded commitments to our principal investments as of March 31, 2008.
Our principal investments generated a loss of $13 million for the three months ended March 31, 2008. This is comprised of a $3 million loss, primarily from our hedge fund investment returns, and $10 million in interest expense.
Segment expenses were $106 million in the first quarter of 2008, down from $180 million from the first quarter of 2007. Segment expenses for the first quarters of 2008 and 2007 included $32 million and $123 million of profit sharing compensation, respectively, which is a function of the performance of various funds.
Fortress's headcount increased by approximately 31% since the first quarter of 2007. As of March 31, 2008, the firm and its affiliates employed 833 people around the world.
The Company had $273 million of share-based compensation expense (primarily relating to expense recorded in connection with the principals agreement and the issuance of restricted stock units to Fortress employees in the IPO) for the quarter ended March 31, 2008, which contributed to our reporting a GAAP net loss per share. Share-based compensation expense is not included in segment expenses or in the calculation of distributable earnings.
3. The gross returns reflect returns for the applicable period for a "new issue eligible" investor investing in the funds at their inception (before management fees and incentive fees). Dividend
The Company paid a first quarter cash dividend of $0.225 per share on its common stock, for the quarter ending March 31, 2008, on April 15, 2008 to stockholders of record on March 31, 2008.
Quarterly dividends are not necessarily representative of the Company's quarterly earnings, but are reflective of our anticipated performance over the next four quarters.
Fortress discloses certain non-GAAP financial information, which management believes provides a meaningful basis for comparison among present and future periods. The following are non-GAAP measures used in the accompanying financial information:
-- Pre-tax distributable earnings (DE) -- Fund management DE -- Segment revenues -- GAAP net income excluding principals agreement compensation
We urge you to read the reconciliation of such data to the related GAAP measures appearing later in this release.
Management will host a conference call today, Thursday, May 8, 2008 at 10:00 AM eastern time. A copy of the earnings release will be posted to the Investor Relations section of Fortress's website, www.fortress.com.
All interested parties are welcome to participate on the live call. The conference call may be accessed by dialing 1-877-717-3044 (from within the U.S.) or 1-706-679-1521 (from outside of the U.S.) ten minutes prior to the scheduled start of the call; please reference "Fortress First Quarter Earnings Call." A simultaneous webcast of the conference call will be available to the public on a listen-only basis at www.fortress.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast.
A telephonic replay of the conference call will also be available until 11:59 P.M. eastern time on Friday, May 16, 2008 by dialing 1-800-642-1687 (from within the U.S.) or 1-706-645-9291 (from outside of the U.S.); please reference access code "44729652."
Fortress is a leading global alternative asset manager with approximately $34.2 billion in assets under management as of March 31, 2008. Fortress manages private equity funds and hedge funds. Fortress was founded in 1998. For more information regarding Fortress Investment Group LLC or to be added to our e-mail distribution list, please visit www.fortress.com.
Cautionary Note Regarding Forward-Looking Statements - Certain statements in this press release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the actual amounts of future dividends and what they represent as a percentage of distributable earnings, our public company surplus, sources of management fees, incentive income and investment income, estimated fund performance, the amount and source of expected capital commitments for the new fund and our effective tax rate. These statements are not historical facts, but instead represent only the Company's beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the Company's control. It is possible that the actual amounts of future dividends and what they represent as a percentage of distributable earnings, our public company surplus, sources of management fees, incentive income and investment income, the amount and source of expected capital commitments for any new fund or our effective tax rate may differ, possibly materially, from these forward-looking statements, and any such differences could cause our actual results to differ materially from the results expressed or implied by these forward-looking statements. For a discussion of some of the risks and important factors that could affect such forward-looking statements, see the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Annual Report on Form 10-K and Quarterly Report on Form 10-Q, each of which is, or will be, available on the Company's website (www.fortress.com). In addition, new risks and uncertainties emerge from time to time, and it is not possible for the Company to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Accordingly, you should not place undue reliance on any forward-looking statements contained in this press release. The Company can give no assurance that the expectations of any forward-looking statement will be obtained. Such forward-looking statements speak only as of the date of this press release. The Company expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
Fortress Investment Group LLC (Prior to January 17, 2007, Fortress Operating Group) Consolidated and Combined Statements of Operations (dollars in thousands, except share data) Three Months Ended March 31, 2008 2007 Revenues Management fees from affiliates $144,057 $43,287 Incentive income from affiliates 37,144 44,229 Other revenues 19,679 19,784 Interest and dividend income - investment company holdings Interest income - 243,713 Interest income from controlled affiliate investments - 4,707 Dividend income - 7,436 Dividend income from controlled affiliate investments - 53,174 200,880 416,330 Expenses Interest expense Investment company holdings - 132,620 Other 10,336 12,019 Compensation and benefits 127,019 217,517 Principals agreement compensation 237,367 138,274 General, administrative and other 16,570 39,305 Depreciation and amortization 2,436 2,009 393,728 541,744 Other Income (Loss) Gains (losses) from investments Investment company holdings Net realized gains (losses) - 86,264 Net realized gains (losses) from controlled affiliate investments - 715,024 Net unrealized gains (losses) - (19,928) Net unrealized gains (losses) from controlled affiliate investments - (1,428,837) Other investments Net realized gains (losses) 1,613 1,789 Net realized gains (losses) from affiliate investments 247 136,041 Net unrealized gains (losses) - (280) Net unrealized gains (losses) from affiliate investments (29,817) (130,828) Earnings (losses) from equity method investees (49,129) 195 (77,086) (640,560) Income (Loss) Before Deferred Incentive Income, Principals' and Others' Interests in Income of Consolidated Subsidiaries and Income Taxes (269,934) (765,974) Deferred incentive income - 307,034 Principals' and others' interests in (income) loss of consolidated subsidiaries 208,269 535,530 Income (Loss) Before Income Taxes (61,665) 76,590 Income tax benefit (expense) (7,252) (14,447) Net Income (Loss) $(68,917) $62,143 Dividends declared per Class A share $0.2250 $0.1674 Earnings Per Unit - Fortress Operating Group January 1 through January 16 Net income per Fortress Operating Group unit $0.36 Weighted average number of Fortress Operating Group units outstanding 367,143,000 Earnings Per Class A share - Fortress Investment Group January 17 through March 31 Net income (loss) per Class A share, basic $(0.74) $(0.87) Net income (loss) per Class A share, diluted $(0.74) $(0.87) Weighted average number of Class A shares outstanding, basic 94,894,636 82,256,078 Weighted average number of Class A shares outstanding, diluted 406,966,186 82,256,078 Fortress Investment Group LLC Consolidated Balance Sheets (dollars in thousands, except share data) March 31, December 31, 2008 2007 (Unaudited) Assets Cash and cash equivalents $372,678 $100,409 Due from affiliates 52,088 198,669 Investments Equity method investees 1,006,438 1,091,918 Options in affiliates 3,804 16,001 Deferred tax asset 508,380 511,204 Other assets 68,318 71,580 $2,011,706 $1,989,781 Liabilities and Shareholders' Equity Liabilities Accrued compensation and benefits $88,306 $269,324 Due to affiliates 477,221 455,734 Dividends payable 21,285 21,285 Deferred incentive income 167,679 173,561 Debt obligations payable 800,000 535,000 Other liabilities 65,468 36,729 1,619,959 1,491,633 Commitments and Contingencies Principals' and Others' Interests in Equity of Consolidated Subsidiaries 226,820 308,023 Shareholders' Equity Class A shares, no par value, 1,000,000,000 shares authorized, 94,597,646 shares issued and outstanding - - Class B shares, no par value, 750,000,000 shares authorized, 312,071,550 shares issued and outstanding - - Paid-in capital 424,566 384,700 Retained earnings (accumulated deficit) (260,008) (193,200) Accumulated other comprehensive income (loss) 369 (1,375) 164,927 190,125 $2,011,706 $1,989,781 Fortress Investment Group LLC (Prior to January 17, 2007, Fortress Operating Group) Reconciliation of Fund Management DE to Pre-tax Distributable Earnings and GAAP Net Income (Loss) (dollars in millions) Three Months Ended March 31, 2008 March 31, 2007 Fund Management DE $71 $203 Investment Income (Loss) (3) 29 Interest Expense (10) (12) Pre-tax Distributable Earnings 58 220 Private equity incentive income 6 15 Hybrid hedge fund incentive income - (46) Castle options management fee - 1 Distributions of earnings from equity method investees - (10) Earnings from equity method investees (41) (11) Gains/losses on options (13) 5 Gains/losses on other investments (18) - Employee equity-based compensation (36) (38) Principal compensation (237) (138) Employee portion of incentive income 10 - Principals' interest in income of consolidated subsidiaries 209 78 Taxes (7) (14) GAAP Net Income (Loss)(1) $(69) $62 1. We had GAAP net income of $133.4 million for the period from January 1, 2007 through January 16, 2007 and a GAAP net loss of $71.3 million for the period from January 17, 2007 through March 31, 2007. Fortress Investment Group LLC (Prior to January 17, 2007, Fortress Operating Group) Reconciliation of Segment Revenues to GAAP Revenues (dollars in millions) Three Months Ended March 31, 2008 March 31, 2007 Segment Revenues $177 $383 Adjust incentive income 6 (29) Adjust income from the receipt of options - 1 Other revenues 18 14 Consolidation and elimination - 47 GAAP Revenues $201 $416
"Distributable earnings" is our supplemental measure of operating performance. It reflects the value created which management considers available for distribution during any period. As compared to generally accepted accounting principles ("GAAP") net income, distributable earnings excludes the effects of unrealized gains (or losses) on illiquid investments, reflects contingent revenue which has been received as income to the extent it is not expected to be reversed, and disregards expenses which do not require an outlay of assets, whether currently or on an accrued basis. Distributable earnings is reflected on an unconsolidated and pre-tax basis, and, therefore, the interests in consolidated subsidiaries related to Fortress Operating Company units (held by the principals) and income tax expense are added back in its calculation. Distributable earnings is not a measure of cash generated by operations which is available for distribution nor should it be considered in isolation or as an alternative to cash flow or net income and it is not necessarily indicative of liquidity or cash available to fund our operations. For a complete discussion of distributable earnings and its reconciliation to GAAP, see note 10 to our financial statements included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2008.
Our management uses distributable earnings: -- in its determination of periodic distributions to equity holders; -- in making operating decisions and assessing the performance of each of our core businesses; -- for planning purposes, including the preparation of our annual operating budgets; and -- as a valuation measure in strategic analyses in connection with the performance of our funds and the performance of our employees.
Growing distributable earnings is a key component to our business strategy and distributable earnings is the supplemental measure used by our management to evaluate the economic profitability of each of our businesses and our total operations. Therefore, we believe that it provides useful information to our investors in evaluating our operating performance. Our definition of distributable earnings is not based on any definition contained in our amended and restated operating agreement.
Fortress Investment Group LLC (Prior to January 17, 2007, Fortress Operating Group) Reconciliation of GAAP Net Income (Loss) Excluding Principals Agreement Compensation to GAAP Net Income (Loss) (dollars in thousands) Three months ended March 31, 2008 GAAP net loss $(68,917) Principals agreement compensation 237,367 Portion not allocable to public shareholders (182,155) GAAP net loss excluding principals agreement compensation $(13,705)
SOURCE Fortress Investment Group LLCContact: Lilly H. Donohue, +1-212-798-6118, for Fortress Investment Group LLC