UPDATE 2-Fortress profit up 9 pct as funds make gains

Thu Aug 2, 2012 12:54pm EDT

* Firm announces quarterly dividend of $0.05 per share

* Profit in line with Street estimates

* Firm sees opportunities in U.S real estate

By Katya Wachtel

Aug 2 (Reuters) - Fortress Investment Group's operating profit got a boost in the second quarter as stronger performance in some of its credit funds, hedge funds and private equity portfolios led to higher incentive income.

New York-based Fortress, one of a handful of publicly traded alternative asset managers, on Thursday reported pre-tax distributable earnings rose 9 percent to $50 million, or 9 cents per share, from $46 million, or 9 cents per share, a year earlier.

Fortress said pre-tax distributable income is the best way to measure its performance because it excludes large quarterly compensation costs stemming from the equity interest of principals who took the company public in 2007.

The earnings were in line with Wall Street expectations, according to Thomson Reuters I/B/E/S.

The company announced a second-quarter dividend of 5 cents per share.

The asset manager reported net income attributable to Class A shareholders of $5 million, compared with a year-earlier loss of $95 million. It said the improvement was due mainly to a reduction in costs associated with a Principals Agreement that expired at the end of 2011.

Profits were lifted by incentive income from its credit, hedge and private equity funds, party offset by lower management fees, the firm said. Over the past year, some Fortress portfolios, in particular its hedge funds, struggled to produce big returns in often turbulent markets, reducing incentive fees.

But in the second quarter, there were gains across the board, with the Drawbridge Special Opportunities credit fund rising 3.3 percent, and the flagship Macro fund returning 1.7 percent. Private Equity fund valuations gained 5.4 percent, and the credit funds have seen double-digit returns since inception.

Those gains contributed to incentive income of $47 million, up from $20 million a year earlier. Pre-tax distributable earnings in the firm's private equity and hedge fund businesses did fall slightly.

Investors withdrew more than $600 million from the hedge funds in the second quarter, about $400 million of it from the liquidation of a commodities hedge fund that was shuttered in May after several months of losses.

As of June 30, total assets under management were $47.8 billion, up 3 percent from $46.4 billion on March 31.

KEEPING CASH IN POCKET

At the end of the second quarter, Fortress had $7.4 billion of so-called 'dry powder' -- money already committed by investors to private equity vehicles that can be invested at a later date, when it will help raise management income.

Peter Briger, who oversees Fortress' credit business, said even though long-term opportunities in credit and broader distressed markets "will be exceptional" because of global deleveraging, current pricing is unattractive.

"Our general view is that risk is mispriced in Europe and in Asia, against us," Briger said on an investor call Thursday morning. "The pace of investing in credit has slowed, reflecting what we feel about the market. We like to be investors when risk premiums are high and when perceived risk is higher than actual risk."

Briger said when compelling opportunities do arise, Fortress will invest aggressively, but stopped short of predicting when that could occur.

More near-term investment opportunities reside in the mortgage servicing sector, Fortress managers said. The company recently launched a dedicated mortgage servicing rights fund that has raised $500 million, which they expect to close in coming weeks.

"The residential space in the U.S is a gigantic one," said Wes Edens, who runs the private equity business. "I think from kind of every twist and turn we think that things have either bottomed or are doing modestly better ... The opportunity set that is yet to play out in the recovery is very much still to come."

Peter Briger noted that real estate opportunities outside of the United States are also on their radar.

"We would like to be bigger investors in Chinese real estate, but we are keeping our cash in our pockets right now," Briger said, noting the firm is "very cautious about the risk that exists in the real estate environment" in that country.

"But we are getting organized about China."

Fortress is currently building a senior housing property, with other partners, in Shanghai.

Fortress shares were trading at about $3.90 in the midday session. The stock closed at $3.91 on Wednesday and is up about 16 percent this year.