Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Fortress Investment Group LLC (NYSE:FIG)

Q3 2013 Earnings Call

October 31, 2013 10:00 am ET

Executives

Gordon Runté

Randal Alan Nardone - Co-Founder, Chief Executive Officer, Principal, and Director

Daniel N. Bass - Chief Financial Officer

Wesley Robert Edens - Co-Founder, Principal, Head of Private Equity, Private Equity Chief Investment Officer, Co-Chairman of the Board, and Member of Committee

Peter Lionel Briger - Co-Chairman of the Board, President, Principal, Head of Credit & Real Estate Business and Member of Management/Organization Development Committee

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress Investment Third Quarter Earnings Call. [Operator Instructions] Thank you.

I would now like to turn the call over to Gordon Runte, Director of Investor Relations. Please go ahead.

Gordon Runté

Okay. Thank you, Jessica. Good morning, everyone, and welcome to the Fortress Investment Group's Third Quarter 2013 Earnings Conference Call. We will begin our call today with opening remarks from Fortress Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. And after these remarks, we will save most of our time this morning for your questions.

And joining us for that portion of our call, we have with us co-Chairman and Head of Credit, Pete Briger; co-Chairman and Head of Private Equity, Wes Edens; Principal and Head of Liquid Markets, Mike Novogratz; along with other members of our senior management team.

So just a few housekeeping items before we begin today. Let me remind you that statements made today that are not historical facts may be forward-looking statements. And these statements are, by their nature, uncertain and may differ materially from actual results. So we encourage you to read the forward-looking statement disclaimer in today's earnings release in addition to the risk factors described in our quarterly and our annual filings.

With that, let me hand off to Randy.

Randal Alan Nardone

Thanks, Gordon, and thanks, everyone, for joining us. 3 quarters into 2013 and we're feeling very good about our prospects for the full year.

AUM of $58 billion is at an all-time high. Investment performance is strong across all businesses. Year-to-date management fees and incentive income are up double- and triple-digits, respectively, over the last year. Unrecognized incentive income, which has not yet been reflected in earnings, rose to $800 million. And the value of cash and investments on our balance sheet grew to $1.6 billion.

For the third quarter, distributable earnings were $0.13 a share. Year-to-date, DE of $0.64 a share is well above full-year results in both 2011 and 2012. With a quarter to go, we're less than $0.10 a share away from delivering our strongest year of distributable earnings since our first year as a public company.

With today's dividend announcement, we've paid or committed $0.18 a share so far this year, the regular quarterly dividends. With 0 debt and strong performance year-to-date, we expect to have ample liquidity when our board considers opportunistic buybacks and a year-end top-up dividend. Of course, our results and prospects for distributions all hinge on investment performance.

So let me start with a few highlights. In Credit PE, outstanding performance continued. And we have realizations leading to $17 million of incentive income for the quarter. This brings full-year realized incentive income in the business to over $100 million. Gross unrealized incentive is now over $600 million. So a great story in Credit PE.

Our main Credit Hedge Fund, DBSO, is also on pace for another outstanding year. With total NAV of $4.6 billion above performance threshold, DBSO had year-to-date net returns of approximately 14% through September. As in the Credit PE Funds, our Credit Hedge Funds have generated significant incentive income, $44 million for the quarter and over $140 million for the year, with value continuing to build on current NAV.

In Private Equity, main fund valuations increased by 10% in the third quarter and 17% year-to-date. That's over $2.7 billion in appreciation for the year. And we feel very good about our prospects for valuations looking ahead.

Part of our optimism stems from the fact that we have a lot of terrific portfolio companies. The most recent highlight is Springleaf Financial, a Fund V investment that completed its IPO in October. Its price as of yesterday's close imply the 12x return on an investment we made just 3 years ago. We haven't sold any Springleaf because we believe there's a great deal of value creation still to come. With Springleaf now public, nearly half the NAV in our Private Equity Funds is in public companies.

In our Liquid Markets business, our flagship Macro and Asia Macro Funds were up nearly 10% and 12% net, respectively, for the year through September. Both gave back some returns in the third quarter, which knocked about $0.05 off of DE. But even with the third quarter giveback, Liquid Markets has already generated $98 million of incentive income through October -- through September, sorry. And performance in both Macro and Asia Macro has turned positive again for October through the 25th.

At Logan Circle, steady strong returns have supported inception to-date performance above respective benchmarks for everyone of Logan 16 fixed-income strategies. As always, investment performance is a source of all good outcomes for our company including driving fundraising efforts.

We raised $3 billion in new commitments in the first half of the year and another $2 billion in the third quarter. So $5 billion year-to-date in our alternatives businesses.

DBSO has raised nearly $340 million this year, while our Liquid strategies have added $2.3 billion and another $125 million for Macro in October.

In Private Equity, after closing our second MSR fund at its cap of $1.1 billion, we're raising capital in 2 additional sector-focused funds, an infrastructure fund and an Italian NPL fund. We're targeting first closings for these funds this quarter.

Additionally, our 3 permanent equity vehicles have raised $1.1 billion year-to-date. At the end of September, we announced our plans for a fourth, New Media, and a little further out on the horizon, we're considering a fifth vehicle focused on senior living. There's a lot of activity and a lot of positive developments in Private Equity right now. And Wes is here to provide detail in the Q&A.

At Logan Circle, we had a very strong quarter with over $1.9 billion of net inflows into our core fixed income strategies. AUM has more than doubled to $23.6 billion since our acquisition in 2010. And we remain focused on growing Logan into a broader traditional platform. We're still early in the marketing process for our growth equity strategies, but we have high expectations to this group, which previously managed $20 billion. So across our businesses, we have a lot of momentum in attracting new capital and some new engines for growth that we're very excited about.

Moving to our balance sheet, there's more good news. At the close of the third quarter, our net cash and investments stood at nearly $1.6 billion or $3.18 a share. That's up from $2.40 a share at the beginning of the year. And we think there's still upside here. With the pace of realizations in Private Equity expected to pick up, we anticipate creating more balance sheet liquidity, which should provide a meaningful additional source of funds for dividends and share repurchases.

So on every key front, it's been a strong year for our company and the leading indicators of future performance, investment returns, capital raising, new business initiatives and opportunities for growth all point to substantial upside potential. We feel very good about our prospects for the remainder of the year and the potential to create substantial value for our shareholders in 2014 and beyond.

With that, let me hand it off to Dan.

Daniel N. Bass

Thanks, Randy. Good morning, everyone. Financial results in the third quarter were solid. And key future earnings indicators such as AUM and capital formation continue to demonstrate significant momentum.

DE in the third quarter was $65 million, bringing year-to-date DE to $313 million or $0.64 per share. This is double our earnings percent -- earnings per share from the same time last year. Through the first 9 months, total revenues are up 47%. And both of our revenue components experienced significant growth. Management fees are up 14%. And incentive income has more than doubled. And all of our businesses have contributed to the growth with each of our alternative businesses posting double-digit DE growth.

AUM finished the quarter at $58 billion, up $3.4 billion or 6%. Alternative AUM increased by 4%. And our traditional AUM grew by 10%. We raised another $2 billion of alternative capital in the third quarter bringing us to almost $12 billion raised since the beginning of last year. This $12 billion of capital raised has been balanced across our businesses, with about 40% of that capital coming in credit and around 30% in both our PE and our Liquid businesses.

Gross undistributed incentive income topped $800 million. This value has increased 24% for the year and has more than doubled in the last 18 months. And finally, our dry powder grew to over $7 billion. This, even after deploying over $800 million of capital in the quarter.

Now let me review each of our businesses. First, in our Credit Funds, DE was $37 million during the quarter, bringing year-to-date DE to $131 million. This is an increase of 64% from the same time period last year. Over the first 3 quarters, our Credit Hedge Funds segment has already recorded more incentive income than it has in any other calendar year. In our Credit PE Funds, we have now recognized incentive income from 16 different funds or managed accounts this year totaling over $100 million. And unrealized incentive income across our credit funds continue to grow. This value is now in excess of $700 million representing a growth of 17% this year alone.

Next in our Private Equity business, DE in the third quarter was $30 million bringing year-to-date DE to $92 million. This is an increase of 10% on a year-to-date basis. Fund valuations were up another $1.6 billion in the quarter bringing PE Fund NAV to almost $18 billion. The primary driver of this increase has been our public investments. For example, the value of our investment in Nationstar was up 50% in the third quarter alone. And after adjusting for the Springleaf IPO, now approximately 46% of our PE portfolio is invested in public positions. This value was 33% at the end of last year. This should provide greater insight into the value of our portfolio, and underscores how our investments are moving along the realization cycle.

Finally, AUM grew 4% in the quarter to $14.9 billion. And importantly, the Springleaf valuation will add another $1 billion to AUM in the fourth quarter. This is due to the fact that our management fee basis will change from invested capital to NAV for this investment.

Moving to our Liquid Funds. DE was a loss of $11 million in the quarter, which is principally attributable to a $26 million reversal of incentive income that has been recognized in the first half of this year.

Let me put the quarter and Liquid in context to the full year. Year-to-date, the Liquid business has produced $78 million of DE, a year-to-year growth of over 400%. We began the fourth quarter with about $4 billion of capital above its high watermarks. And in addition, there's another $1.2 billion of capital within 1% of their respective high watermarks. And as Randy mentioned, we are off to a good start in the fourth quarter-to-date as our Fortress Macro Fund and our Fortress Asia Macro Fund are up an estimated 20 and 90 bps respectively in the month of October through the 25th.

And finally, at Logan Circle. AUM finished the quarter at $23.6 billion, growth of 10% in the quarter and 14% so far this year. With significant net inflows during the quarter, net flows into this business are now over $3 billion for the year and $9 billion since the beginning of last year.

A few points on the balance sheet, which has 2 stories taking shape. First, at $3.18 per share, the value of our net cash and investments continue to grow and remains a significant portion of our stock price. This per share value has now grown by nearly 50% in the last 2 years. Second, which is often overlooked, earnings from our balance sheet can meaningfully contribute to our DE. During the third quarter, we produced $12 million or $0.02 per share of DE from our principal investment segment. Half of this DE came from the partial sale of GAGFAH shares from our balance sheet. Further, our balance sheet still contains over $600 million of embedded gains that will become DE when those balance sheet investments are realized.

Finally, a point or 2 on taxes. We expect our full year DE tax rate to be in the 7% to 10% range. And as I mentioned last quarter, we expect to see our tax rate increase in 2014 to a percentage in the upper teens or a low 20% range.

In closing, let me summarize what we know about our business today and how it positions us for the remainder of this year and next. First, AUM is at an all-time high. And we have seen growth in all of our businesses this year. More importantly, we have strategies in place across all of our businesses to create additional growth. Second, we have seen the impact that superior fund performance can have on earnings. It has allowed us to double our earnings per share in the first 9 months, while also continuing to build a large supply of embedded earnings, which sets us up well for the future. And finally, our balance sheet continues to be a substantial source of value. We have no debt outstanding, an ample amount of cash on hand. And our investment values continue to grow. And with an uptick in realizations, cash flow and earnings from our balance sheet investments should follow. In summary, these facts leave me confident in the outlook for a strong conclusion to this year and a great start to next.

Thank you. We will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Just first, the Q here isn't out yet. So I'm wondering if you can give us an update on PE Funds III and IV, how they're tracking as of end of September relative to the preferred thresholds? Because both these funds, I think, were down 70%-plus as of year-end '11. So I'm just wondering if we're kind of close to a level where we could start getting meaningful performances?

Randal Alan Nardone

Yes. Fund III is within 2% of its high watermark, around $44 million away on a $2.8 billion NAV. And Fund IV is 20% away, about $900 million on a $4.4 billion NAV. The Q will be filed later today.

Craig Siegenthaler - Crédit Suisse AG, Research Division

All right. Second question here is your net cash investment has grown really quickly here. I realized the year-over-year change is benefiting from the GAGFAH realization. But I'm wondering, are any of your investments in the balance sheet like far to East Coast or potentially holiday, are they marked fairly conservatively that we could see another kind of bump up in your sort of balance sheet value here?

Wesley Robert Edens

Craig, it's Wes. The marks on both of those on a quarter-over-quarter basis are pretty much flat. And both of those investments, I think, have got a substantial amount of potential, both for Liquidity, as well as for mark. So you can't forecast the exact timing or the amount of them. But they're both -- there's a lot going on in both those investments right now, that's positive.

Operator

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Step up in operating expenses here for a few quarters, I'm just wondering, and I'll throw this out to jump on. I guess is there -- if you look by segment, think about sort of where your build or what the expenses and where the leverage might come from, where maybe your build for a little more growth in assets over time. Can you sort of take us through where we should expect to see maybe more fundraising activity come through in the future, generate some operating leverage, or maybe where the expense growth that we've seen will sort of ebb here?

Daniel N. Bass

Our operating expenses are up minimally year-over-year primarily due to the add of some of our Equities business in Logan Circle. And our revenues are up quite significantly. The reason why our expense is up is the profit-sharing comp is up significantly, which is tied to increased revenues. So you'll see a direct correlation there. But our operating expenses, we believe, are strongly geared to scalability in all of our businesses.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

And then, Wes, can you give us some more color on the Private Equity portfolio? I know it's difficult to talk about the pace of realizations from here on in, but I'd be curious sort of the state of affairs of the PE portfolio? And also with your discussions with LPs, where are we sort of in the cycle of fundraising for you guys for sort of the main fund?

Wesley Robert Edens

Sure. As Randy said, valuations for the quarter were up 10.1% through yesterday. I think for the year, they're up 18.9%, which follows last year, which was 25.6%. So we've got a pretty good run of it. In fact, if you look at the funds from kind of a low point a few years ago to today, I think the nominal dollars are up $10.7 billion. So the big numbers are actually pretty big. Once again, for both the quarter and the year-to-date, the financial services investments have been kind of star performers. The big news for the quarter was on LEAF, which we acquired 100 -- 80% of that business for $125 million almost exactly 3 years ago. That position today has guided about $1.5 billion. And more importantly, we think that there's actually a long ways to go. One thing I'd say in the financial services space, is that the non-bank financial services in particular, the sectors that are focused on either servicing stuff we've got a big exposure to or the non-prime consumer, we've gone through these periods of kind of windfall profitability at least on a marked basis as these things have grown a lot. I think you're about to enter a period of some real consolidation opportunities. So far from being at the end of it, I think you're entering kind of a different phase where there's likely to be a lot of activity. There's, again, without being too specific, there's a bunch of things that we're focused on. You think you've got promise there, but you had tremendous growth. Nationstar has gone from, whatever, $10 billion to $400-plus billion. And there's been a couple of other companies in this sector that have grown a lot. I think there will be some big opportunities, both for capital structure improvement, as well as consolidation. So some interesting and exciting stuff to do. Other activity we had in the quarter that was material, that may not be as apparent as we -- we're a big investor in gaming. They started a process about 1.5 years ago that successfully concluded and then splitting a company to an Opco, Propco. So the first casino gaming REIT that is out there. I think that, that thing has got a ton of optionality to it. We're excited about that. We liquidated a portion of our position there to accommodate the transaction we still own big chunks of, both the Opco and the Propco. So that, I think, is great. We've got a couple of other, 2 other companies that we expect to take public probably either at the end of this year, the beginning of next year. So there's a lot of capital markets activity. So the -- in the Private Equity stuff, it's -- as Dan said, we're within spitting distance of the kind of promote threshold on a couple of the funds. And I really think that we've got a long ways to go. So -- and we need to turn those into profitability. And I'm pretty optimistic that we can do so. The transportation stuff as well, we haven't talked about a lot. And the marks are flat, but we've got great stuff going on, and particularly in our Florida investments. Those are big balance sheet investments, as well as sidecar investments and whatnot. So I think we'll have some big news there, hopefully, in the next 3 months or so to talk about on that side. Last thing I'd say is that one of the things that we have been working on quietly, but it's a big focus of mine, is kind of this focus on the permanent capital vehicles. We currently have from 2 companies that we have, unlimited life capital a couple of years ago. We now have 5. We manage about $4.3 billion in total across that. In particular, the sectors that we're excited about, transportation and infrastructure, where we've got our company, Wwtai, which is a private company right now, but that invests in transportation infrastructure assets. In financial services, we are -- spent out earlier this year, which is New Residential and then senior living, where we've been making investments inside Newcastle and seed in living space. If you look at the biggest companies in those sectors, they're all kind of $20-plus billion businesses. So obviously, we intend to be very big and credible in each one of those sectors. So that's something that, I think, the COC segment are reporting on it probably in the not-so-distant future. And that's something that, I think, to really keep an eye on because permanent capital is permanent capital. It's a great complement to the Private Equity Funds. So...

Operator

Your next question comes from the line of Bulent Ozcan with RBC.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Just a question on your balance sheet and your plans in regards to your balance sheet. How should we think about it in terms of the timing as you're moving to a balance sheet-like model. What would you consider as access capital that you could sell down or reduce going down and basically distribute back to investors?

Randal Alan Nardone

I'll take a whack at it, and then everybody else can comment as well. Right now, the balance sheet, $1.6 billion, is bigger than it needs to be to support the business. And so as the balance sheet tends to liquefy, which we expect to happen as realizations ramp up, we would anticipate distributing those proceeds. To size -- to come up with a size of what a balance sheet ought to be for this business, and one way to think about it is seeding funds, retaining capital to seed new funds and to buy new businesses. But certainly, $1.6 billion is more than it needs to be.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

And maybe on Logan Circle, I know you got that nice inflows, which was great. Did the Growth Equities business, that's David Shell's team, contribute to any of these flows? Or is it still too early for them to contribute meaningfully to inflows?

Randal Alan Nardone

We're in the business of -- that business is just ramping up, of course. They -- they're in the market raising capital now. And we would expect to, if not this quarter, first quarter next year, to start seeing capital flow into that business.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Okay. And maybe, final here, it's a typical question on the opportunities to deploy capital. But what is your sense of the opportunities in Europe right now? It seems like there's a lot of -- basically, a lot of investments are chasing few investment opportunities. There was news out there that basically for a $300 million portfolio of nonperforming residential mortgages in Spain that there were about 30 offers. What do you see in terms of pricing? Is it getting irrational?

Peter Lionel Briger

This is Pete Briger. There's been quite a bit of capital that has been raised to chase distressed debt and real estate opportunities in Europe. I would characterize it as overfunded and competitive. I think your story about how much capital and how many bids is relatively consistent with what we're seeing out there. Europe, in the periphery, has begun to stabilize. I wouldn't say, in any respect, has begun to recover meaningfully, but it has begun to stabilize. And there's a tremendous amount of capital out there chasing European opportunities.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

A follow-up question for Wes. There's a lot of news in the quarter on Florida East Coast railway that you got the final right-of-way to link Miami and Orlando. And I wonder if you can kind of outline the opportunities there? I mean, I guess, question I've had is how many people in Florida really want to ride a train? Well, let's start with that one. I mean, how big is that opportunity passenger rail service between Miami and Orlando?

Randal Alan Nardone

We think it's a tremendous opportunity. As you said, we got the final approval for the right-of-way from Cocoa Beach to Orlando. So if you think of the map of Florida, we own the freight train, which runs from Miami up to Jacksonville. We intend to run the passenger train, have it side-by-side with it. So basically build infrastructure incremental to our existing infrastructure, which we think will cost a couple billion dollars and take a couple years. So it's actually a fraction compared to what a true high-speed rail would take so to begin to accomplish something fairly quickly. When you look at the rail corridors that are similar to this, both the United States and around the world, it's got all the attractive characteristics you want. It's kind of the too far to drive, too short to fly characteristics. The big numbers are that we think that there's kind of 50 million relevant trips that happen between Miami and Orlando today. If we capture 4% of them, we make a couple $100 million. We capture 6% of them, we actually make $300 million, $400 million. And when you compare that to the London to Paris, where they capture 80% of the traffic, Madrid to Seville, they capture 28% of the traffic, we think that those numbers are very, very achievable. Incremental to the rail opportunity is, of course, a real estate opportunity, right? So the functional density of rail stations for commercial traffic is spectacular. So the highest sales per square foot of any shopping mall, I think, in America is the Union Station in Washington D.C. We're basically building that in Downtown Miami. So we own a site that is kind of the nexus of all the transportation hubs in Downtown Miami. And we think that it will be a tremendously viable and profitable enterprise. So...

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Is that the Flagler station or...?

Wesley Robert Edens

Yes. It's actually, well, there's -- it is a 9-acre site that's got, I don't know, 5 million square feet of entitlements. So it's basically a couple blocks in from where the American Airlines arena is. So that's where the people movers come. That's where all the stuff kind of comes into downtown. So it's really exciting. I think the Florida investments away from that have done terrifically, where we own about a 1/3 of the industrial real estate land in South Florida. And the development there has been spectacular in the past couple of years. But I think that this passenger rail story is something that's going to be really, really material. Like I said, I think you'll see a lot of news on that, I hope, over the next 2 or 3 months.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Okay. And then a Reuters story quoted it as saying it's $1.5 billion project. And I mean, do you -- if you can comment on it. Does Fortress intend to do a vehicle on that? Or is that going to be outside money? Or how do you raise that?

Wesley Robert Edens

Yes. The total capital, we think, including the rolling stock is about $2.2 billion. The trains will run on it. So the hard infrastructure costs will be close to your $1.5 billion number. And we're out seeking kind of construction business. There's a process that's going on there right now. We're going to capitalize this in a separate company and raise capital, both equity and debt, incremental to this. We've got a lot of capital in the company right now. So it's a heavily equitized situation, which is great. And we're just trying to sort out the final detail from a capital formation right now. and that's what I hope to be in position to talk about sooner rather than later.

Operator

Your next question comes from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

And I apologize upfront if I got on the call late, so you may have talked about this before in the call. But is there any guidance or update you could maybe give us as we look ahead to Q4 and maybe into next year? I mean, cash generations have been pretty good. There's -- balance sheet's extremely liquid, no debt, a lot of assets generating a turn off of that. So any thoughts to maybe being a little bit more, I guess, precise on how you're thinking about the amounts of cash generation over the course of a year you'd be looking to return? I mean, certainly some of your peers have specific ranges that they target. I don't know if you've given any thought to being comfortable, increasingly comfortable to put that out there, whether it's 70%, 60%, 80% of kind of cash generation?

Randal Alan Nardone

It's Randy. At year-end, we'll take a look. We, and the board, will take a look at the whole year, the incentive income, management fees, balance sheet, liquidity and determining what to do in terms of dividend. We'll definitely consider buybacks if we have that opportunity. I'd say it's worth noting that about half of the shareholders of the company are sitting in this room. So we're pretty aligned. The focus will certainly be what's the best way to deliver value for shareholders.

Operator

Your next question comes from the line of Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Follow-ups here, first one for Pete. How should we think about the timing behind the realizations of the $612 million that you have in the Credit Fee business just as we think about it from an income statement perspective?

Peter Lionel Briger

Well, I think you should think about it any way you want. And from our standpoint, we feel like it's a mediocre credit market for making new investments, but a very good market for realizing on investments. And we will try to create realizations where we can, where we get paid for them in our portfolio. But no promises.

Craig Siegenthaler - Crédit Suisse AG, Research Division

So maybe can you more specifically -- is it looking like you're holding most of these to maturity here or more sales? And if you hold a lot of these credits to maturity, what's kind of the average embedded duration today?

Peter Lionel Briger

I think a lot of those credits don't hold themselves to getting paid off at par, if that's where you're going, and holding them to maturity. I think from our perspective, much of the liquid portions of our portfolio have been sold into the marketplace. So what we have now is more illiquid positions, which we will manage to optimize. And I'm really not thinking about those positions and optimizing them in the context of our income statement. I'm thinking about it in terms of optimizing them with regard to the investment funds that we manage.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then just one follow-up here for Dan Bass. I noticed you have this $100 million in option value on the balance sheet. That's certainly growing a lot. I think that's related to Newcastle. I don't think you include that in your kind of net cash investment calculation. Should you or is that asset sort of illiquid?

Daniel N. Bass

No, we do not. We include it in our embedded incentive because we treat those as incentive income for DE purposes when we exercise and sell them. So that's why they're not included in the balance sheet. They would not go into our investment income when realized, they would go into incentive income.

Operator

[Operator Instructions] At this time, there are no further questions. I would now like to turn the call back over to Mr. Randy Nardone for closing remarks.

Randal Alan Nardone

Thanks, everybody, for your questions and for your interest in Fortress. Just a quick recap, we covered a lot of ground today. I feel very good about our performance 3 quarters into the year, and about the momentum that we're carrying into the fourth quarter and 2014. A lot of positive activity and developments across our business. Strong performance in the funds and new drivers of future growth that we're excited about. And a growing stockpile of embedded value that sets us up very well for future periods. We're closing in on our best year of DE since our very first as a public company. And we see a great deal of upside potential looking further ahead. So thanks, again, for joining us. And we look forward to providing an update in a few months.

Operator

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fortress Investment Group LLC Management Discusses Q3 2013 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts