Fortress Reports Third Quarter 2017 Results
Fortress Reports Third Quarter 2017 Results
New York, NY. November 9, 2017 ? Fortress Investment Group LLC (NYSE: FIG) ("Fortress" or the "Company") today reported its third quarter 2017 financial results.
FINANCIAL SUMMARY ? Management Fee Paying Assets Under Management ("AUM") of $36.1 billion as of September 30,
2017, down 2% compared to the previous quarter's AUM, adjusted to exclude the Logan Circle business which Fortress sold in September 2017 ? GAAP net income of $190 million, or $0.37 per diluted Class A share, for the third quarter of 2017, compared to GAAP net income of $58 million, or $0.07 per diluted Class A share, for the third quarter of 2016 ? GAAP net income of $215 million, or $0.43 per diluted Class A share, for the first nine months of 2017, compared to GAAP net income of $16 million, or $0.02 per diluted Class A share, for the first nine months of 2016 ? Pre-tax distributable earnings ("DE") of $291 million, or $0.73 per dividend paying share, for the third quarter of 2017, compared to pre-tax DE of $90 million, or $0.23 per dividend paying share, for the third quarter of 2016 ? Pre-tax DE of $451 million, or $1.14 per dividend paying share, for the first nine months of 2017, compared to pre-tax DE of $255 million, or $0.64 per dividend paying share, for the first nine months of 2016 ? Net cash and investments of $1.4 billion, or $3.54 per dividend paying share, as of September 30, 2017 ? $1.4 billion of gross embedded incentive income across funds and permanent capital vehicles as of September 30, 2017, that has not yet been recognized in DE ? Total uncalled capital, or "dry powder," of $7.5 billion as of September 30, 2017, including $4.5 billion available for general investment purposes
BUSINESS HIGHLIGHTS ? Completed the sale of Logan Circle Partners, L.P. ("Logan Circle") to MetLife, Inc. ("MetLife") ? Raised $1.8 billion of capital across alternative investment businesses in the first nine months of 2017 ? Investment performance summary as of September 30, 2017:
o Annualized inception-to-date net IRRs for Credit Opportunities Fund ("FCO"), FCO II and FCO III of 22.9%, 15.6% and 10.3%, respectively
o Third quarter and year-to-date 2017 net returns of 2.0% and 5.6%, respectively, for the Drawbridge Special Opportunities Fund ("DBSO") LP
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.
1
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 fourth quarter 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 RESULTS1,2,3
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 September 30, 2017. The condensed consolidated GAAP statement of operations and balance sheet are presented on pages 10-11 of this press release.
(in millions, except per share amount) GAAP
Revenues Expenses Other Income (loss) Net income (loss) Net income (loss) attributable to Class A Shareholders
Per diluted share Weighted average Class A shares outstanding, diluted
Distributable Earnings Fund management DE Pre-tax DE Per dividend paying share/unit Weighted average dividend paying shares and units outstanding
Assets Under Management Private Equity and Permanent Capital Credit1 Liquid Markets2 Logan Circle3 Total Assets Under Management
3Q 2017
2Q 2017
3Q 2016
% Change
QoQ
YoY
YTD 2017
YTD 2016
% Change QoQ
$ 254 $ 247 $ 261
248
210
225
231
8
29
190
32
58
89
15
31
$ 0.37 $ 0.06 $ 0.07
394
395
390
3% 18% N/A 494% 493% N/A
$ 100 $
82 $
88
291
86
90
$ 0.73 $ 0.22 $ 0.23
396
397
394
22% 238% 232%
$ 14,172 16,816 5,121 -
$ 36,109
$ 14,682 17,708 4,558 35,483
$ 72,431
$ 13,917 18,287 4,541 33,386
$ 70,131
(3)% (5)% 12% N/A (50)%
(3)%
$ 734 $ 725
1%
10%
699
671
4%
N/A
240
(27) N/A
228%
215
16
N/A
187%
100
8
N/A
N/A
$ 0.43 $ 0.02
N/A
394
390
14% 223% 217%
$ 243 $ 249
451
255
$ 1.14 $ 0.64
397
396
(2)% 77% 78%
2% (8)% 13% N/A (49)%
$ 14,172 16,816 5,121 -
$ 36,109
$ 13,917 18,287 4,541 33,386
$ 70,131
2% (8)% 13% N/A (49)%
1 The Assets Under Management presented for Credit includes $1,371 million of AUM related to co-managed funds as of 3Q 2017. 2 The Assets Under Management presented for Liquid Markets includes $5,083 million of AUM related to the Affiliated Manager as of 3Q 2017. 3 Fortress sold the Logan Circle business in September 2017.
2
GAAP RESULTS Fortress recorded GAAP net income of $190 million, or $0.37 per diluted Class A share, for the third quarter of 2017, compared to GAAP net income of $58 million, or $0.07 per diluted Class A share, for the third 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 third quarter 2017 GAAP net income was primarily driven by a $202 million increase in other income, partially offset by a $40 million increase in income tax expense, a $23 million increase in expenses and a $7 million decrease in revenues. The $202 million increase in other income was primarily due to the completed sale of Logan Circle, which resulted in a gain on sale of $189 million, net of selling expenses. The $23 million increase in expenses was primarily related to higher compensation and benefits expense. The $7 million decrease in revenues was primarily related to lower incentive income from non-affiliates, lower other revenues and lower management fees from affiliates and non-affiliates, partially offset by higher incentive income from affiliates.
3
SEGMENT RESULTS (NON-GAAP)4,5,6,7,8,9,10
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 pretax 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.
(in millions) Assets Under Management4 Dry Powder Average Management Fee Rate5 Incentive Eligible NAV Above Incentive Income Threshold6
Undistributed Incentive Income: Unrecognized Undistributed Incentive Income: Recognized Undistributed Incentive Income7
(in millions) Third-Party Capital Raised
Segment Revenues Management fees Incentive income Total
Segment Expenses Operating expenses8 Profit sharing compensation expenses Total
Earnings From Affiliated Manager Principal Performance Payments Fund Management DE8
Net Investment Income9 Pre-tax Distributable Earnings8,9
Total
$
36,109
$
7,484
$
22,123
$
1,402
$
98
$
1,500
As of September 30, 2017
Private Equity
Permanent
Funds
Capital Vehicles
Credit Funds
Hedge Funds
PE Funds
$
6,249 $
$
627 $
1.2%
7,923 $ -$
1.5%
8,452 $ 365 $ 2.0%
8,364 6,492 1.3%
$
1,973 $
4,840 $
6,042 $
9,268
$
254 $
-
$
254 $
56 $ 34 90 $
69 $ 64 133 $
1,023 -
1,023
Liquid Hedge Funds
$
5,121
N/A
1.0%
$
-
$
-
-
$
-
Logan Circle Partners10
$
-
N/A
N/A
$
-
$
-
-
$
-
Total
$
242
Three Months Ended September 30, 2017
Private Equity
Permanent
Funds
Capital Vehicles
Credit Funds
Hedge Funds
PE Funds
$
-$
-$
242 $
-
Liquid Hedge Funds
$
-
Logan Circle Partners10
$
-
$
131 $
140
271
(122) (41)
(163)
4
(12)
$
100 $
191
$
291 $
20 $ 11 31
(7) (3) (10)
(2) 19 $ 15 34 $
31 $ 58 89
(34) (3)
(37) -
(6) 46 $
46 $
37 $ 28 65
(27) (13) (40)
(2) 23 $ 1 24 $
29 $ 42 71
(32) (22) (54)
(2) 15 $ 6 21 $
1$
13
1
-
2
13
(2)
(15)
-
-
(2)
(15)
4
-
-
-
4$
(2)
-
170
4$
168
4 The Assets Under Management presented for the Credit Hedge Funds includes $1,371 million related to co-managed funds and $743 million
related to the third party originated JP Funds and Value Recovery Funds. The Assets Under Management presented for the Liquid Hedge Funds includes $5,083 million related to the Affiliated Manager. 5 The Average Management Fee Rate presented for the Credit Hedge Funds excludes the co-managed funds and third-party originated JP Funds
and Value Recovery Funds (see footnote 4 above). The Average Management Fee Rate presented for the Liquid Hedge Funds excludes the Affiliated Manager. 6 The Incentive Eligible NAV Above Incentive Income Threshold presented for Credit Hedge Funds excludes co-managed funds, certain third
party originated funds and sidepocket investments and for Liquid Hedge Funds, excludes the Affiliated Manager and sidepocket investments. The Incentive Eligible NAV Above Incentive Income Threshold presented for Private Equity Funds and Credit PE Funds (except for a portion of Long Dated Value Fund I, whose capital was above the incentive income threshold as of September 30, 2017), represents total fund NAV. The Incentive Eligible NAV Above Incentive Income Threshold presented for the Permanent Capital Vehicles represents the equity basis that is used to calculate incentive income. 7 Undistributed Incentive Income - Recognized represents the results of the main fund investments for the Credit Hedge Funds including the
impact of realized gains and losses and unrealized losses on sidepocket investments. Undistributed Incentive Income - Unrecognized represents the results of the Private Equity Funds, Credit PE Funds and Liquid and Credit Hedge Fund sidepocket and redeeming capital account (RCA) investments which have not been recognized in Distributable Earnings and will be recognized when realized. The Undistributed Incentive Income presented for the Credit Hedge Funds excludes co-managed funds and certain third party originated funds and for Liquid Hedge Funds, excludes the Affiliated Manager. Undistributed Incentive Income for Credit PE Funds includes $5 million of net unrealized gains that would have been recorded in Distributable Earnings if Fortress had settled Japanese Yen foreign exchange derivative contracts used to economically hedge estimated future incentive income it had outstanding as of September 30, 2017. Undistributed Incentive Income for Permanent Capital Vehicles includes $56 million of incentive income that would have been recorded in Distributable Earnings if Fortress had (i) exercised all of its in-themoney options it holds in the Permanent Capital Vehicles and sold all of the resulting shares, (ii) sold all of its Permanent Capital Vehicle common shares which it received as incentive income and (iii) sold all of its Permanent Capital Vehicle common shares which it received from previously exercised Permanent Capital Vehicle options, based on their respective September 30, 2017 closing prices. 8 Includes Unallocated Expenses of $5 million incurred by Fortress related to the proposed acquisition by SoftBank. 9 Includes Unallocated Investment Income of $1 million and Unallocated Expenses of $2 million. 10 Fortress sold the Logan Circle business in September 2017.
4
Pre-tax DE was $291 million in the third quarter of 2017, up from $90 million in the third quarter of 2016, primarily due to higher investment income and incentive income, partially offset by higher operating expenses and lower management fees.
Management fees were $131 million in the third quarter of 2017, down from $136 million in the third quarter of 2016. The decrease was primarily due to lower management fees from the Credit PE Funds, Credit Hedge Funds, Logan Circle and Private Equity Funds, partially offset by higher management fees from the Permanent Capital Vehicles.
Incentive income in the third quarter of 2017 totaled $140 million, up from $113 million in the third quarter of 2016, primarily due to higher incentive income from the Permanent Capital Vehicles and Private Equity Funds, partially offset by lower incentive income from the Credit PE Funds and Credit Hedge Funds.
Earnings from the Affiliated Manager totaled $4 million in the third quarter of 2017, up from $3 million in the third quarter of 2016.
The Company's segment revenues and distributable earnings will fluctuate materially depending upon the performance of its funds and the realization events within its private equity businesses, as well as other factors. Accordingly, the revenues and distributable earnings in any particular period should not be expected to be indicative of future results.
ASSETS UNDER MANAGEMENT
As of September 30, 2017, AUM totaled $36.1 billion. As of quarter end, approximately 85% of AUM was in funds with long-term investment structures.
During the quarter, Fortress's AUM decreased primarily due to (i) the sale of Logan Circle which had $37.1 billion of AUM, (ii) $2.1 billion of capital distributions to investors, (iii) $0.2 billion in distributions to investors in redeeming capital accounts, and (iv) a $0.2 billion capital reset adjustment. These decreases to AUM were partially offset by (i) $0.6 billion in market-driven valuation gains, (ii) a $0.5 billion increase in the AUM of the Affiliated Manager and co-managed funds, (iii) a $0.3 billion increase in invested capital, and (iv) $0.2 billion of new capital raised that was directly added to AUM.
As of September 30, 2017, the Credit Funds and Private Equity Funds had $6.9 billion and $0.6 billion of uncalled capital, respectively, that will become AUM if called. Uncalled capital or dry powder ? capital committed to the funds but not invested and generating management fees ? includes $3.0 billion that is only available for follow-on investments, management fees and other fund expenses.
5
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