Fortress Posts Higher Than Expected Earnings

NEW YORK (Reuters) – Fortress Investment Group (FIG.N) reported higher-than-expected quarterly earnings, helped by a strong performance from its credit-focused funds, and its shares rose nearly 5 percent.

The New York-based hedge fund and private equity firm said pretax distributable income, which excludes noncash compensation charges and other costs, rose 24 percent to $73 million, or 14 cents per share, in the second quarter from $59 million, or 12 cents per share, a year earlier.

Analysts on average expected 8 cents per share, according to Thomson Reuters I/B/E/S.

Fortress contends pretax distributable income is the best way to measure the company’s performance because it excludes a big quarterly expense stemming from the equity interest of its principals, who took the company public in 2007.

Management and incentive fees generated from the operation of Fortress’ funds rose to $169 million from $117 million. Incentive income, which a manager collects when its funds outperform, increased to $50 million from $7 million.

Assets under management were $41.7 billion as of June 31.

Fortress’ credit-related hedge funds and private equity funds were some of its strongest performers. Those funds benefited from the general improvement in the debt market from a year ago, when the worst of the financial crisis was just beginning to ease. In particular, Fortress said private equity investments had made a sharp rebound.

In the second quarter, the company’s credit-market hedge funds generated $18 million in pretax distributable earnings, up from $7 million a year earlier. Its credit-related private equity funds churned out $29 million in pretax distributable earnings, up from $4 million a year ago.

In 2007 Fortress became one of the first alternative investment management firms to go public. Its stock has been a disappointment.

At Wednesday’s close, the stock was down 11.5 percent this year and well below its initial public offering price of $18.50.

Fortress shares were up 4.8 percent at $4.13 in morning trading on the New York Stock Exchange.

This year the firm has taken steps to bolster and diversify its performance by buying bond manager Logan Circle Partners for $21 million and announcing a deal in July for loan servicing firm CWCapital.

On Wednesday, Fortress said it had hired Stuart Bohart, former co-head of Morgan Stanley’s asset management group, as a senior managing director.

While distributable earnings are the preferred metric used by Fortress to measure its profitability, that formula does not comply with U.S. Generally Accepted Accounting Principles.

Under the more traditional GAAP measurement, Fortress’ second-quarter loss widened to $92 million, or 57 cents a share, from $45 million, or 41 cents a share, a year earlier.

Much of the GAAP loss stemmed from the regular quarterly $237 million expense Fortress takes as a five-year amortization of the value of the equity interests of its top executives at the time of the IPO.

The quarterly expense is slated to end in February 2012, the fifth anniversary of the IPO and the end of the vesting period for the top manager’s equity interests. (Reporting by Matthew Goldstein in New York and Archana Shankar in Bangalore; Editing by Vinu Pilakkott, John Wallace and Lisa Von Ahn)