Fortress Reports Third Quarter 2017 Results

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:
  • 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
  • Third quarter and year-to-date 2017 net returns of 2.0% and 5.6%, respectively, for the Drawbridge Special Opportunities Fund (“DBSO”) LP

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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.

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 RESULTS

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.

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.

SEGMENT RESULTS (NON-GAAP)

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 pre-tax 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.

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.

BUSINESS SEGMENT RESULTS

Below is a discussion of third quarter 2017 segment results and business highlights.

Credit:

• DBSO LP had third quarter and year-to-date 2017 net returns of 2.0% and 5.6%, respectively
• DBSO Ltd had third quarter and year-to-date 2017 net returns of 2.6% and 5.8%, respectively
• FCO, FCO II, FCO III, FJOF and FJOF II (Yen) recorded annualized inception-to-date net IRRs of 22.9%, 15.6%, 10.3%, 27.7% and 27.8%, respectively, through September 30, 2017
• Nearly $1.2 billion of gross embedded incentive income that has not yet been recognized in DE

(See supplemental data on pages 17-18 for more detail on Credit results)

The Credit business, which includes our Credit PE Funds and Credit Hedge Funds, generated pre-tax DE of $45 million in the third quarter of 2017, down from $68 million in the third quarter of 2016. The year-over-year decrease in DE was primarily driven by lower incentive income, partially offset by lower profit sharing expense.

The Credit Hedge Funds generated pre-tax DE of $24 million for the quarter, down from $36 million in the third quarter of 2016, primarily due to lower incentive income. Fortress’s flagship credit hedge fund, DBSO LP, had net returns of 2.0% for the quarter and annualized inception to date net returns of 10.6% as of September 30, 2017.

The Credit PE Funds generated pre-tax DE of $21 million in the quarter, compared to $32 million in the third quarter of 2016, primarily due to lower incentive income. Over the last twelve months, the Credit PE Funds have recognized $161 million of gross incentive income, while gross unrecognized Credit PE incentive income has increased $129 million year-over-year to $1.0 billion as of September 30, 2017.

Private Equity and Permanent Capital Vehicles:

• Permanent Capital Vehicles generated $58 million of incentive income in the quarter
• PE Fund valuations appreciated 3.2% in the quarter

(See supplemental data on pages 15-16 for more detail on Private Equity results)

The Private Equity business recorded pre-tax DE of $80 million in the third quarter of 2017, up from $27 million in the third quarter of 2016. The year-over-year increase was primarily driven by higher incentive income and higher investment income.

The Permanent Capital Vehicles generated pre-tax DE of $46 million in the quarter, up from $14 million in the third quarter of 2016, primarily due to higher incentive income. The Private Equity Funds generated pre-tax DE of $34 million, up from $13 million in the third quarter of 2016, primarily due to higher investment income and higher incentive income.

Liquid Hedge Funds:

• Earnings from the Affiliated Manager totaled $4 million in the quarter

(See supplemental data on page 19 for more detail on Liquid Hedge Funds results)

The Liquid Hedge Funds recorded pre-tax DE of $4 million in the third quarter of 2017, up from a $5 million pre-tax DE loss in the third quarter of 2016. The year-over-year increase was due to higher earnings from the Affiliated Manager and lower operating expenses.

Logan Circle:

• Completed the sale of Logan Circle to MetLife

(See supplemental data on page 20 for more detail on Logan Circle results)

Logan Circle recorded $168 million of pre-tax DE for the third quarter of 2017, including $170 million of investment income primarily related to the completed sale of Logan Circle to MetLife in September 2017.

LIQUIDITY & CAPITAL

As of September 30, 2017, Fortress had cash and cash equivalents of $666 million and debt obligations of $105 million.

As of September 30, 2017, Fortress had approximately $0.9 billion of investments in Fortress funds and options in publicly traded permanent capital vehicles and a total of $183 million in outstanding commitments to its funds. In addition, the NAV of Fortress’s investments in its own funds exceeded its segment cost basis by $507 million at quarter end, representing net unrealized gains that have not yet been recognized for segment reporting purposes.

DIVIDEND

In connection with the proposed merger between Fortress and an affiliate of SoftBank, Fortress has contractually agreed that it will not pay any dividends with respect to periods ending after March 31, 2017 while the merger agreement remains in effect.

NON-GAAP INFORMATION

DE is a supplemental metric used by management to measure Fortress’s operating performance. DE is a measure that management uses to manage, and thus report on, Fortress’s segments, namely: Private Equity, Permanent Capital Vehicles, Credit Hedge Funds, Credit PE Funds, Liquid Hedge Funds and Logan Circle. DE differs from GAAP net income in a number of material ways. For a detailed description of the calculation of pre-tax DE and fund management DE, see Exhibit 3 to this release and note 10 to the financial statements included in the Company’s most recent quarterly report on Form 10-Q.

Fortress aggregates its segment results to report consolidated segment results, as shown in the table under “Summary Financial Results” and in the “Total” column of the table under “Consolidated Segment Results (Non-GAAP).” The consolidated segment results are non-GAAP financial information. Management believes that consolidated segment results provide a meaningful basis for comparison among present and future periods. However, consolidated segment results should not be considered a substitute for Fortress’s consolidated GAAP results. The exhibits to this release contain reconciliations of the components of Fortress’s consolidated segment results to the comparable GAAP measures, and Fortress urges you to review these exhibits. Fortress also uses weighted average dividend paying shares and units outstanding (used to calculate pre-tax DE per dividend paying share) and net cash and investments. The exhibits to this release contain reconciliations of these measures to the comparable GAAP measures, and Fortress urges you to review these exhibits.

ABOUT FORTRESS

Fortress Investment Group LLC is a leading, highly diversified global investment firm with $36.1 billion in assets under management as of September 30, 2017. Founded in 1998, Fortress manages assets on behalf of over 1,750 institutional clients and private investors worldwide across a range of credit, real estate, permanent capital and private equity investment strategies. Fortress is publicly traded on the New York Stock Exchange (NYSE:FIG). For more information regarding Fortress Investment Group LLC or to be added to its e-mail distribution list, please visit www.fortress.com.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this communication may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are generally identified by the use of words such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “will,” “should,” “could,” “would,” “seek,” “approximately,” “predict,” “intend,” “plan,” “estimate,” “anticipate,” “opportunity,” “pipeline,” “comfortable,” “assume,” “remain,” “maintain,” “sustain,” “achieve” or the negative version of those words or other comparable words. Forward-looking statements are not historical facts, but instead represent only Fortress’s beliefs as of the date of this communication regarding future events, many of which, by their nature, are inherently uncertain and outside of Fortress’s control. Numerous factors could cause actual events to differ 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. Such factors include but are not limited to the following: (1) conditions to the closing of the merger, including the obtaining of required regulatory approvals, may not be satisfied; (2) the merger may involve unexpected costs, liabilities or delays; (3) the business of Fortress may suffer as a result of uncertainty surrounding the merger; (4) the outcome of any legal proceedings related to the merger; (5) Fortress may be adversely affected by other economic, business, and/or competitive factors, including the net asset value of assets in certain of Fortress’s funds; (6) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; (7) risks that the merger disrupts current plans and operations and the potential difficulties in employee retention as a result of the merger; (8) other risks to consummation of the merger, including the risk that the merger will not be consummated within the expected time period or at all; and (9) the risks described from time to time in Fortress’s reports filed with the SEC under the heading “Risk Factors,” including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and in other of Fortress’s filings with the SEC. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Fortress to predict or assess the impact of every factor that may cause its actual results to differ from those expressed or implied in any forward-looking statements.

Accordingly, you should not place undue reliance on any forward-looking statements contained in this communication, and you should not regard any forward-looking statement as a representation by Fortress or any other person that the future plans, estimates or expectations currently contemplated by Fortress will be achieved. Fortress 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 communication. Fortress expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Fortress’s expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.