Higher revenues drove Fortress Investment Group LLC FIG to deliver a positive earnings surprise of 40% in the final quarter of 2014. On Thursday, the New York- based investment manager reported fourth quarter 2014 pre-tax distributable earnings (DE) of 28 cents per share, outpacing the Zacks Consensus Estimate of 20 cents. Also, the reported figure came ahead of the prior-year quarter figure of 24 cents per share.
With this earnings beat, the company delivered positive earning surprises in three of the four quarters of 2014 while it missed in the remaining quarter.
Results were primarily aided by higher revenues, which came on the back of higher management fees and incentive income. Also, the company witnessed enhanced management fee paying assets under management (AUM). However, on the downside, the quarter experience elevated expenses.
Segment wise, compared with the prior-year quarter, Credit business recorded higher pre-tax DE while Private Equity business and Liquid Hedge Funds recorded lower pre-tax DE. Logan circle reported breakeven pre-tax DE, compared with pre-tax DE loss in the prior-year quarter.
Pre-tax distributable earnings of Fortress Investment stood at $123 million, up 2% year over year. On a GAAP basis, net income came in at $148 million, down significantly from the prior-year quarter net income of $318 million.
For 2014, the company reported pre-tax distributable earnings of 99 cents per share, outpacing the Zacks Consensus Estimate of 92 cents. Also, the reported figure increased 13% year over year. Pre-tax distributable earnings for 2014 increased 3% year over year to $446 million. On a GAAP basis, net income came in at $233 million, down 52% year over year.
Business Highlights
For 2014, total segment revenue increased 3% year over year to $1.1 billion. Also, it surpassed the Zacks Consensus Estimate of $918 million.
Total segment revenue surged 23% year over year to $344 million in the fourth quarter. Further, it beat the Zacks Consensus Estimate of $249 million.
Management fees summed $153 million in the quarter, up 7% from the prior-year quarter. The rise was mainly driven by increased management fees from the Credit Hedge Funds, Logan Circle, Liquid Hedge Funds and Permanent Capital Vehicles. However, lower management fees from the Private Equity Funds partially offset the increase.
Incentive income was $191 million, up 40% from the prior-year quarter. The increase was primarily attributable to higher incentive income from the Credit PE Funds and Permanent Capital Vehicles. The increase was partially offset by decline in incentive income from Liquid Hedge Funds, Credit Hedge Funds and Private Equity Funds.
Total segment expenses increased 40% year over year to $222 million. This upswing was primarily driven by higher operating expenses as well as profit sharing compensation expenses.
As of Dec 31, 2014, management fee paying AUM rose 9% year over year to $67.5 billion. Notably, the Logan Circle division witnessed net client inflows of $1.0 billion. Management noted that the quarter marked “an all-time high” AUM.
Balance Sheet
As of Dec 31, 2014, total uncalled capital totaled $7.8 billion out of which approximately $5.5 billion is available for common investment purposes.
As of Dec 31, 2014, cash and cash equivalents were $391.1 million, compared with $364.6 million as of Dec 31, 2013. Debt obligation stood at $75 million in the quarter. Notably, there was no debt obligation outstanding as of Dec 31, 2013.
Special Dividend
Concurrent with the earnings release, management declared fourth quarter cash dividend of 38 cents per share, which consists of a special cash dividend of 30 cents per share and quarterly cash dividend of 8 cents per share. The dividend will be paid on Mar 17, 2015 to Class A shareholders of record as of Mar 12, 2015.
Our Viewpoint
Results reflect a strong quarter for Fortress Investment. The company’s steady organic growth keeps us optimistic. However, the company’s mounting expenses and the persistent macroeconomic headwinds across the industry keep us apprehensive.
Currently, Fortress Investment carries a Zacks Rank #4 (Sell).
Performance of Other Investment Management Firms
Among other investment management firms, Invesco Ltd. IVZ, Affiliated Managers Group Inc. AMG and Ameriprise Financial Inc. AMP outpaced the Zacks Consensus Estimate in their latest earnings releases. Their results were driven by revenue growth, partially offset by elevated expenses. Further, all three firms have recorded impressive AUM growth.
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