Fortress Fig Leaf Needs Adjustment

Fortress Investment Group (FIG) released its results. It opens very bullishly. Pre-tax distributable earnings of $111 million, up 66% from 3Q 2006. Management fee paying assets under management of $31.2 billion, up 62% from 3Q 2006. Segment revenues of $219 million, an increase of 80% from 3Q 2006. Then they tell you GAAP net income excluding principals' agreement expense is $17 million. GAAP net loss is $38 million. Is it too old fashioned to think that if you can post increases of 62% to 80% you should be making a pile of dough and not reporting losses.

These are the very smart guy's who can buy and restructure but apparently have trouble creating a profit. Hmmm

Pre-tax distributable earnings for the quarter were reported as $111 million, or $0.26 per dividend paying share, a 66% increase over our pre-tax distributable earnings for the third quarter 2006 of $67 million. Declared third quarter dividend is $0.225 per share (or $0.90 per share on an annualized basis). Can you stand to calculate the dividend coverage ratio. Currently the stock trades north of a 5% dividend yield. This is considered by many to be a warning signal of risk and trouble.

FIG goes on to say "Distributable earnings and distributable earnings per dividend paying share are supplemental measures of our operating performance that we believe provide a meaningful basis for comparison between present and future periods. We intend to target dividends that reflect a payout ratio over time of approximately 75% of distributable earnings after tax related payments and reserves."

Supplemental to what? Earnings headed to investors are not supplemental to anything. It's the only metric that means anything in the end. Targeting a 75% dividend payout when your stock is trading north of 5% dividend yield is pretty fancy talk. A lot of good things need to keep happening consistently.

FIG continues to double talk with the following paragraph "The Company's quarterly segment revenues and distributable earnings will fluctuate materially depending upon the realization events within our private equity business, as well as other factors. Accordingly, the revenues and profits in any particular quarter should not be expected to be indicative of future results. Quarterly dividends are not necessarily representative of the Company's earnings in the current quarter, but are reflective of our anticipated performance over time."

Talk about covering all the bases. The press release is circuitous. 5% dividend yield. Dividend targets of 75% payouts. Caveats that earnings may fluctuate dramatically. Further caveats that dividends are not always going to be connected to actual results but will be reflective of managements future expectations. Do not forget about a congress that wants to change the tax rules.

Highly unlikely that FIG would accept this rationale from an investment. Why should investors accept it from FIG?