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Fifth Street Asset Management Inc. Announces Second Quarter 2015 Results

  • Pro Forma Adjusted Net Income of $9.3 million or $0.19 per share for the quarter ended June 30, 2015
  • Fee-earning AUM of $4.3 billion at June 30, 2015
  • Total revenues were $24.2 million for the quarter ended June 30, 2015, a 3.3% year-over-year increase
  • Management fees represented 95.4% of total revenues for the quarter ended June 30, 2015

GREENWICH, CT, Aug. 13, 2015 (GLOBE NEWSWIRE) -- Fifth Street Asset Management Inc. (NASDAQ:FSAM) ("FSAM" or "we") announces its financial results for the second quarter ended June 30, 2015.

Second Quarter 2015 Financial Highlights

  • Pro Forma Adjusted Net Income (which excludes the results of MMKT) for the quarter ended June 30, 2015 was $9.3 million or $0.19 per share;
  • Fee-earning Assets Under Management ("AUM") was $4.3 billion as of June 30, 2015, representing a $42 million increase from June 30, 2014;
  • Total revenues for the quarter ended June 30, 2015 increased 3.3% to $24.2 million as compared to the quarter ended June 30, 2014;
  • Management fees represented 95.4% of total revenues for the quarter ended June 30, 2015; and
  • We utilized our share repurchase program to purchase approximately 73,000 shares in the open market.

"We are pleased that despite macro trends that have adversely affected the broader credit markets, FSAM was able to grow revenues on a year-over-year basis. During the same period, adjusted net income declined due to higher operating expenses from investing in talent, infrastructure and growth initiatives. While investing in the platform creates near-term earnings pressure, we continue to position FSAM for long-term growth," stated Chief Executive Officer, Leonard M. Tannenbaum.

Results of Operations

Total revenues increased by 3.3%, or $0.8 million, to $24.2 million for the quarter ended June 30, 2015, as compared to $23.4 million for the quarter ended June 30, 2014. Management fees (which include base management fees and Part I fees) for the quarter ended June 30, 2015 were $23.1 million, or 95.4% of total revenues.

After adjusting for non-recurring and reimbursed items, net expenses increased by 25.8%, or $1.9 million, to $9.4 million for the quarter ended June 30, 2015, as compared to $7.4 million for the quarter ended June 30, 2014. The increase in net expenses was due primarily to increases in employee costs due to additions in headcount of 17 employees during the year-over-year period.

Pro Forma Adjusted Net Income was $9.3 million for the quarter ended June 30, 2015, which represented a $2.0 million, or 17.8%, decrease as compared to $11.3 million for quarter ended June 30, 2014. Pro Forma Adjusted Net Income per share was $0.19 for the quarter ended June 30, 2015, versus $0.23 per share for the quarter ended June 30, 2014. Pro Forma Adjusted Net Income reflects an adjustment for net federal, state and local corporate income tax expenses, and excludes the financial results of MMKT Exchange LLC ("MMKT"), a consolidated subsidiary of FSAM that was formed to develop technology related to the financial services industry. Including the results of MMKT (net of tax), Pro Forma Adjusted Net Income for the quarter ended June 30, 2015 was $9.1 million, or $0.18 per share.

Dividend Declaration

On August 10, 2015, our Board of Directors declared a quarterly dividend of $0.17 per share of our Class A common stock. The declared dividend is payable on October 15, 2015 to stockholders of record at the close of business on September 30, 2015.

Key Performance Metrics

Three months ended
June 30,
Six months ended
June 30,
2015 2014 2015 2014
(dollars in thousands, except per share amounts)
Total revenues $24,166 $23,405 $49,036 $47,172
Net income $10,348 $9,060 $21,176 $23,549
Pro Forma Adjusted Net Income(1) $9,256 $11,263 $18,619 $21,447
Pro Forma Adjusted Net Income Per Share $0.19 $0.23 $0.37 $0.43
Management Fees as % of total revenues 95.4% 95.9% 95.1% 95.7%
AUM at end of period(2) $5,554,885 $4,737,411 $5,554,885 $4,737,411
Fee-earning AUM at end of period(3) $4,343,433 $4,301,759 $4,343,433 $4,301,759

(1) Adjusted Net Income represents income before income tax benefit (provision) as adjusted for (i) certain compensation-related charges, including the amortization of equity-based awards related to our reorganization and IPO, (ii) non-recurring underwriting costs relating to public offerings of our funds, (iii) non-recurring professional fees incurred in connection with our IPO and (iv) other non-recurring items. Pro Forma Adjusted Net Income reflects an adjustment for federal, state and local corporate income taxes, net of tax benefits related to basis adjustments due to our IPO and excludes the financial results of MMKT. Income before income tax benefit (provision) is the GAAP financial measure most comparable to Adjusted Net Income and net income is the GAAP financial measure most comparable to Pro Forma Adjusted Net Income. Please refer to Exhibit A for a reconciliation of income before income tax benefit (provision) to Adjusted Net Income and Pro Forma Adjusted Net Income.

(2) AUM refers to assets under management of our funds and material control investments of these funds and represents the sum of the net asset value of such funds and investments, the drawn debt and unfunded debt and equity commitments at the fund or investment level (including amounts subject to restrictions) and uncalled committed debt and equity capital (including commitments to funds that have yet to commence their investment periods).

(3) Fee-earning AUM refers to the AUM on which we directly or indirectly earn management fees and represents the sum of the net asset value of our funds and their material control investments and the drawn debt and unfunded debt and equity commitments at the fund or investment level (including amounts subject to restrictions).

Fee-earning AUM

The following table provides a roll-forward of fee-earning AUM for the three and six months ended June 30, 2015 (shown in thousands):

Three Months Ended
June 30, 2015
Six Months Ended
June 30, 2015
Beginning balance $5,323,341 $5,554,013
Commitments and equity raises 207,353 273,541
Subscriptions, deployments and changes in leverage (1,172,022) (1,473,977)
Redemptions and distributions (42,440) (76,985)
Change in fund value 27,201 66,841
Ending balance $4,343,433 $4,343,433
Average fee-earning AUM $4,833,387 $4,948,723
Effective annualized management fee rate 1.91% 1.88%

The following table provides a roll-forward of fee-earning AUM by fund strategy for the quarter ended June 30, 2015 (shown in thousands):


FSC

FSFR

FSOF
Senior Loan
Funds

Total
Beginning balance $4,094,870 $637,793 $40,577 $550,101 $5,323,341
Commitments and equity raises 175,000 32,353 207,353
Subscriptions, deployments and changes in leverage (1,190,900) 3,537 (1,225) 16,566 (1,172,022)
Redemptions and distributions (27,601) (8,840) (4,160) (1,839) (42,440)
Change in fund value 20,451 2,141 (95) 4,704 27,201
Ending balance $2,896,820 $809,631 $35,097 $601,885 $4,343,433
Average fee-earning AUM $3,495,845 $723,712 $37,837 $575,993 $4,833,387

Fee-earning AUM was $4.3 billion as of June 30, 2015, which represented a $979.9 million, or 18.4%, decrease from $5.3 billion as of March 31, 2015. The net decrease in fee-earning AUM was primarily comprised of $961.2 million from FSC's sale of Healthcare Finance Group, LLC ("HFG"), which was partially offset by $175.0 million of incremental investment capacity as a result of the closing of FSFR's Citibank credit facility. We do not expect the disposition of the underlying portfolio assets of HFG to have a material effect on our management fee revenue in future periods.

Recent Developments

On July 14, 2015, FSC announced that it finalized a waiver in which we agreed to waive a portion of the FSC base management fee for increases in capital relating to the issuances of new equity. The initial term of the waiver is effective until January 1, 2017, at which point it is our intention to renew the waiver annually. Assuming new shares are issued, the blended fee, which will be between 1% and 2%, will be applied in the same manner as currently applied under FSC's investment advisory agreement.

On August 5, 2015, MMKT issued $2.0 million in a new series of convertible promissory notes under similar terms as the original series of MMKT notes. In connection with this transaction, the original MMKT notes (including an $800,000 note held by us) were canceled and exchanged for new notes in the amount of the original principal plus accrued interest. MMKT continues to seek additional external financing to execute on its strategy.

On August 10, 2015, our Board of Directors declared a quarterly dividend of $0.17 per share of our Class A common stock. The declared dividend is payable on October 15, 2015 to stockholders of record at the close of business on September 30, 2015.

Non-GAAP Financial Measures and Operating Metrics

Certain of the terms used in this press release, including AUM, fee-earning AUM, Adjusted Net Income and Pro Forma Adjusted Net Income, may not be comparable to similarly titled measures used by other companies. In addition, our definitions of AUM and fee-earning AUM are not based on any definition of AUM or fee-earning AUM that is set forth in the agreements governing the investment funds that we manage and may differ from definitions of AUM set forth in other agreements to which we are a party from time to time. Further, Adjusted Net Income and Pro Forma Adjusted Net Income are not performance measures calculated in accordance with GAAP. Adjusted Net Income has been included in this press release to adjust for certain one-time and non-recurring items. Pro Forma Net Adjusted Net Income has been included in this press release to reflect certain tax adjustments in connection with our IPO and excludes the financial results of MMKT. We use Adjusted Net Income and Pro Forma Adjusted Net Income as measures of our operating performance, not as measures of liquidity. We believe that Adjusted Net Income and Pro Forma Adjusted Net Income provide investors with a meaningful indication of our core operating performance and Adjusted Net Income and Pro Forma Adjusted Net Income are evaluated regularly by our management as decision tools for deployment of resources. We believe that reporting Adjusted Net Income and Pro Forma Adjusted Net Income is helpful in understanding our business and that investors should review the same supplemental non-GAAP financial measures that our management uses to analyze our performance. Adjusted Net Income and Pro Forma Adjusted Net Income have limitations as analytical tools and should not be considered in isolation or as a substitute for analyzing our results prepared in accordance with GAAP. The use of Adjusted Net Income or Pro Forma Adjusted Net Income without consideration of related GAAP measures is not adequate due to the adjustments described herein. Income before income tax benefit (provision) is the GAAP financial measure most comparable to Adjusted Net Income and net income is the GAAP financial measure most comparable to Pro Forma Adjusted Net Income. Please refer to Exhibit A for a reconciliation of income before income tax benefit (provision) to Adjusted Net Income and Pro Forma Adjusted Net Income.

Conference Call Information

We will host a conference call at 10:00 a.m. (Eastern Time) on Friday, August 14, 2015 to discuss our second quarter 2015 financial results. All interested parties are welcome to participate. Domestic callers can access the conference call by dialing (855) 791-2033. International callers can access the conference call by dialing +1 (631) 485-4910. All callers will need to enter the Conference ID Number 77467340 and reference "Fifth Street Asset Management Inc." after being connected with the operator. All callers are asked to dial in 10-15 minutes prior to the call so that name and company information can be collected. An archived replay of the call will be available shortly after the end of the conference call through August 21, 2015, to domestic callers by dialing (855) 859-2056 and to international callers by dialing +1 (404) 537-3406. For all replays, please reference Conference ID Number 77467340. An archived replay will also be available online in the "Investor Relations" section of FSAM's website under the "News & Events - Calendar of Events" section. FSAM's website can be accessed at fsam.fifthstreetfinance.com.

About Fifth Street Asset Management Inc.

Fifth Street Asset Management Inc. (NASDAQ:FSAM) is a nationally recognized credit-focused asset manager. The firm has over $5 billion of assets under management across two publicly-traded business development companies, Fifth Street Finance Corp. (NASDAQ:FSC) and Fifth Street Senior Floating Rate Corp. (NASDAQ:FSFR), as well as multiple private investment vehicles. The Fifth Street platform provides innovative and customized financing solutions to small and mid-sized businesses across the capital structure through complementary investment vehicles and co-investment capabilities. With a 17-year track record focused on disciplined credit investing across multiple economic cycles, Fifth Street is led by a seasoned management team that has issued billions of dollars in public equity, private capital and public debt securities. Fifth Street's national origination strategy, proven track record and established platform are supported by approximately 100 professionals across locations in Greenwich, Chicago, Palo Alto and Dallas. For more information, please visit fsam.fifthstreetfinance.com.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views with respect to, among other things, future events and financial performance. Words such as "believes," "expects," "will," "estimates," "projects," "anticipates," and "future" or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. New risks and uncertainties arise over time, and it is not possible for the company to predict those events or how they may affect it. Therefore, you should not place undue reliance on these forward-looking statements. The company does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Exhibit A. Calculation of Adjusted Net Income and Pro Forma Adjusted Net Income

Income before income tax benefit (provision) is the GAAP financial measure most comparable to Adjusted Net Income and net income is the GAAP financial measure most comparable to Pro Forma Adjusted Net Income. The following table provides a reconciliation of Income before income tax benefit (provision) to Adjusted Net Income and Pro Forma Adjusted Net Income (shown in thousands, except per share amounts):

Three months ended June 30, Six months ended June 30,
2015 2014 2015 2014
Income before provision for income taxes $11,663 $9,060 $23,713 $23,549
Adjustments:
Compensation-related charges(1)(2) 1,478 5,446 2,964 5,965
Lease termination charges(3) (71)
Professional fees and other expenses in connection with our IPO 660 660
Adjusted Net Income(4) $13,141 $15,166 $26,606 $30,174
Net loss attributable to MMKT(5) 319 430
Pro Forma income tax provision(6) (5,365) (5,083) (10,739) (11,086)
Pro Forma tax receivable agreement benefit 1,161 1,180 2,322 2,359
Pro Forma Adjusted Net Income $9,256 $11,263 $18,619 $21,447
Pro Forma weighted average shares outstanding(7) 49,968 50,000 49,984 50,000
Pro Forma Adjusted Net Income per Class A common share(7) $0.19 $0.23 $0.37 $0.43

(1) For the three months ended June 30, 2015 and 2014, this amount includes $0.3 million and $0.5 million, respectively, of amortization expense relating to certain equity-classified compensation awards. For the six months ended June 30, 2015 and 2014, this amount includes $0.5 million and $1.0 million, respectively, of amortization expense relating to certain equity-classified compensation awards. As of the date of our IPO, the $8.2 million unamortized portion of these awards represented the fair value at their respective grant dates as determined by an independent third party appraisal net of cash paid for the awards and is being amortized on a straight-line basis over an eight year vesting period.

(2) For the three and six months ended June 30, 2015, this amount includes $1.2 million and $2.5 million, respectively, of amortization expense relating to stock-based compensation that was awarded to certain of our employees in connection with our IPO. For the three and six months ended June 30, 2014, this amount includes (1) $3.1 million of noncash compensation expense relating to the separation of a former equity member in May 2014 and (2) a $1.8 million cash payment to purchase the equity interest from the former member.

(3) Includes non-recurring charges for termination payments and related exit costs accrued at present value relating to our office leases.

(4) Adjusted Net Income is presented on a pre-tax basis.

(5) Represents net income (loss) attributable to the operations of MMKT, a consolidated subsidiary of FSAM that was formed to develop technology related to the financial services industry.

(6) Based on our estimated statutory tax rate and includes an adjustment for pro forma tax benefits related to basis adjustments due to our IPO.

(7) Presented with the assumption that 100% of the LP interests in Fifth Street Holdings L.P. were converted on a one-for-one basis into shares of our Class A common stock.

Exhibit B. Consolidated Statements of Financial Condition as of June 30, 2015 and December 31, 2014

As of
June
30,

2015
December 31,
2014
Assets (unaudited)
Cash and cash equivalents $1,469,850 $3,238,008
Management fees receivable (includes Part I Fees of $8,928,563 and $11,307,080 at June 30, 2015 and December 31, 2014, respectively) 23,065,693 26,861,787
Performance fees receivable 76,855 106,635
Prepaid expenses 795,591 1,150,013
Investments in equity method investees 6,412,635 4,115,429
Subordinated debt interest in CLO: held-to-maturity 1,043,144
Beneficial interest in CLO: available-for-sale (cost: $3,589,727) 3,022,329
Due from affiliates 1,990,691 3,799,542
Fixed assets, net 10,040,992 10,274,263
Deferred tax assets 55,900,659 57,972,039
Deferred financing costs 2,181,099 2,432,764
Other assets 5,289,719 4,197,358
Total assets $111,289,257 $114,147,838
Liabilities and Equity
Liabilities
Accounts payable and accrued expenses $2,145,028 $3,045,651
Accrued compensation and benefits 6,468,078 11,095,548
Income taxes payable 361,052
Loans payable 4,153,255 4,000,000
Credit facility payable 33,000,000 12,000,000
Dividend payable 1,445,411
Due to Principal 9,063,792
Due to affiliates 13,861 62,781
Deferred rent liability 3,173,252 3,261,434
Payable to related parties pursuant to tax receivable agreements 47,373,245 47,373,245
Total liabilities 97,772,130 90,263,503
Commitments and contingencies
Equity
Class A common stock, $0.01 par value 500,000,000 shares authorized; 5,926,775 and 6,000,033 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively 59,267 60,000
Class B common stock, $0.01 par value 50,000,000 shares authorized; 42,856,854 shares issued and outstanding as of June 30, 2015 and December 31, 2014 428,569 428,569
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued and outstanding as of June 30, 2015 and December 31, 2014
Additional paid-in capital 7,244,720 4,975,073
Accumulated other comprehensive loss (40,575)
Retained earnings 945,531 1,288,995
Total stockholders' equity, Fifth Street Asset Management Inc. 8,637,512 6,752,637
Non-controlling interests in Fifth Street Holdings L.P. 4,879,615 17,131,698
Total equity 13,517,127 23,884,335
Total liabilities and equity $111,289,257 $114,147,838

Exhibit C. Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014

For the three
months ended
June 30,
For the six
months ended
June 30,
2015 2014 2015 2014
Revenues
Management fees (includes Part I Fees of $8,928,563 and $8,958,572 and $17,429,817 and $17,739,080 for the three and six months ended June 30, 2015 and 2014, respectively) $23,058,289 $22,451,668 $46,637,687 $45,154,394
Performance fees (12,747) 76,855
Other fees 1,120,621 953,415 2,321,745 2,018,054
Total revenues 24,166,163 23,405,083 49,036,287 47,172,448
Expenses
Compensation and benefits 9,225,279 11,805,604 18,532,965 19,181,182
Fund offering and start-up expenses 144,905 290,753
General, administrative and other expenses 2,633,265 2,442,418 5,434,574 4,058,594
Depreciation and amortization 417,692 106,234 820,398 232,908
Total expenses 12,276,236 14,499,161 24,787,937 23,763,437
Other income (expense)
Interest income 171,032 5,001 183,140 9,639
Interest expense (458,999) (24,932) (830,180) (49,589)
Income (loss) from equity method investments 108,468 (9,952) 113,912
Other income, net 61,000 66,000 122,000 66,000
Total other income (expense), net (226,967) 154,537 (534,992) 139,962
Income before provision for income taxes 11,662,960 9,060,459 23,713,358 23,548,973
Provision for income taxes 1,315,041 2,537,107
Net income 10,347,919 9,060,459 21,176,251 23,548,973
Net income attributable to Predecessor (9,060,459) (23,548,973)
Net income attributable to non-controlling interests in Fifth Street Holdings L.P. (9,141,173) (18,660,175)
Net income attributable to Fifth Street Asset Management Inc. $1,206,746 $ $2,516,076 $
Net income per share attributable to Fifth Street Asset Management Inc. Class A common stock: Basic and Diluted $0.20 $0.42
Weighted average shares of Class A common stock outstanding - Basic 5,968,353 5,984,193
Weighted average shares of Class A common stock outstanding - Diluted 5,976,746 5,992,657

CONTACT: Investor Contact: Robyn Friedman, Vice President, Investor Relations (203) 681-3720 IR-FSAM@fifthstreetfinance.com Media Contact: Nick Rust Prosek Partners (212) 279-3115 ext. 252 pro-fifthstreet@prosek.com

Source:Fifth Street Asset Management