Q1 2022 Invesco Ltd Earnings Call
Good morning, and thank you all for joining US as a reminder, this conference call and the related presentation may include forward looking statements, which reflect management's expectation about future events and overall operating plans and performance. These forward looking.
<unk> are made as of today and are not guarantees they involve risks uncertainties and assumptions and there can be no assurance that actual results will not differ materially from our expectations for a discussion of these risks and uncertainties. Please see the risks described in our most recent Form 10-K and subsequent.
Filings with the SEC Invesco makes no obligation to update any forward looking statement.
We may also discuss non-GAAP financial measures during today's call reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation.
Welcome to <unk> first quarter results conference call all participants will be in a listen only mode until the question and answer session at that time to ask a question. Please press star one this call will last for one hour so allow me.
All participants to ask questions only one question and a follow up can be submitted per participant today's conference is being recorded if you have any objections. You may disconnect. At this time now I would like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco, and Allison Dukes, Chief Financial Officer, Mr. Flanagan you may begin.
Alright, Thank you very much operator, and thanks, everybody for joining us and it's typically what we'll do I'll hit some of the highlights Alison will get more details on our results and then we'll open up to Q&A.
So I'm going to start with.
Slide three if you happen to be following along.
With the deck.
Solid business momentum continued during the first three months of the year. We did have net term long term inflows of 17.2.
$2 billion in the first quarter. This is the seventh consecutive quarter of net long term inflows and our annualized organic growth rate in the quarter was 6%. Despite the market backdrop, we are all experiencing.
This is a key outcome of a broadly diversified set of capabilities. We've built over the past decade and in this volatile market environment. We continue to be extremely focused on our clients and the strength.
The diversification of our business enabled us to continue anticipating and meeting their evolving needs.
In the first quarter, we continued to see strong demand for our key capability areas in particular, Etfs and fixed income.
We maintain our focus on and investment in several key areas, including fixed Etfs fixed income.
Factor index private markets.
Active global equity Greater China solutions.
This approach has helped us generate consistent strong broad organic growth rate and we ended the quarter with $1 six trillion dollars in assets under management.
Looking at our specific capabilities, our global ETF platform closed out a very strong quarter Etfs generated net inflows of $19 billion in the first quarter. This includes the flagship <unk> product.
Did increase market share in both.
Assets under management and revenues and Allison is going to spend a few minutes as Greg go in more depth into the ETF platform.
We continue to see clients, increasing their allocation to alternatives strategies as they search for diversification and higher returns.
Invesco has build a broad and competitive platform across real estate and private credit to meet these client demand needs. We are confident in our ability to accelerate growth in these capabilities and private real estate net long term inflows for $300 million in the first quarter. This comprise new acquisition activities of $2 1 billion in investment realizations, one 8 billion.
And our private credit business.
Robust bank loan product demand resulted in net loss.
Long term inflows of $3 1 billion <unk>.
Including the launch of two new CLO.
Our active fixed income business remains strong generating long term net inflows of $2 5 billion in the first quarter, including $2 2 billion from greater China.
Our active global equity business, our flagship products, including Invesco developing markets fund did see net long term outflows of $1 5 billion due to the impact of the geopolitical environment that we are experiencing.
On the institutional side, our solutions enabled opportunities accounted for 30% of our institutional pipeline at the end of the quarter within greater China JV had net long term inflows of $3 2 billion in the quarter and our business in China continues to be a source of strength of diversification and we expect continued strong growth in the year <unk> had well.
Recognizing the near term headwinds in China.
The momentum in our business has generated strong cash flows improving our cash position to the point, where we resumed share buybacks in the first quarter buying back $200 million in common shares during the quarter.
Building, a strong balance sheet and improving our financial flexibility put us in a position to take advantage of an economically attractive opportunity to redeem $600 million of debt that matures in November which will now be redeemed in early may.
Given the strong momentum and growth in our business. The board has also approved a 10% increase in the quarterly dividend.
As we look forward.
Determining diverse excuse me <unk>.
Delivering consistent organic growth together with our disciplined approach to expense management, which should enable us to generate attractive operating margins over the long term while at the same time, allowing us to continue investing in growth and the efficiency of our global business.
<unk> position as the Investor client web firm differentiate us in the marketplace.
Combined with the depth and breadth of our perhaps of our capabilities our competitive strength, we are well positioned to win in a dynamic operating environment. We continue to focus our efforts on delivering positive outcomes for clients, while driving future growth and delivering value over the long term for our stakeholders that I will turn it over to Alison Alison.
Thank you Marty and good morning, everyone I'll start with slide four our investment performance continued to be solid in the first quarter with 59% or 68% of actively managed funds in the top half of peers are beating benchmark on a five year and a 10 year basis.
These results reflect continued strength in fixed income balanced product in Asian equities, all areas, where we continue to see demand from clients globally.
Moving to slide five we ended the quarter with $1 six trillion.
A decrease of 55 billion from December 31.
As Marty noted earlier, our diversified platform generated net long term inflows in the first quarter of $17 2 billion.
Presenting nearly 6% annualized organic correct.
Active AUM net long term inflows were $800 million and passive AUM net long term inflows were $16 4 billion.
Despite the end market declines and FX rate changes led to a decrease in AUM of $85 billion.
The retail channel.
Channel generated net long term inflows of $10 4 billion in the first quarter driven by inflows into global ETF products.
The institutional channel demonstrated the breath of our platform and generated net long term inflows of $6 8 billion with diverse mandate, both regionally and by capability funding in the period.
Regarding retail net inflows, our ETF capabilities generated net inflows of 19 point of view.
$2 billion.
Excluding the Q2 Q, our net long term inflows were $18 7 billion.
I'll provide a little more commentary on our global ETF platform on the next several slides, but before I do let me take a moment and touch on flows by both geography and asset class on slide six.
You'll note that the Americas had net long term inflows of $7 9 billion in the quarter, while we saw strength in Etfs and our institutional business, we did see pressure from select active equity strategies, including developing markets and the diversified dividend.
Asia Pacific saw net long term inflows of $5 6 billion.
Representing organic growth of 11% net.
Net inflows were diversified across the region and included $3 $2 billion of net long term inflows from Invesco, great wall, our joint venture in China.
EMEA, excluding the UK also delivered a strong quarter of net long term inflows totaling $5 9 billion, representing organic growth of 16%.
This was driven by strength in Etfs and sales of senior loan products.
From an asset class perspective, we continued to see broad strength in fixed income in the first quarter with net long term inflows of $4 $8 billion.
Drivers of fixed income flows included institutional net flows into various fixed income strategies through our China, JV global investment grade stable value and various fixed income ETF strategies.
Our alternative asset class holds many different capabilities and this is reflected in the strong flows we saw in the first quarter net long term inflows in alternatives for $7 6 billion, representing organic growth of 15% and was driven primarily by our private credit business.
This included two newly launched Clo's and net long term inflows into our senior line capabilities.
In addition, we saw net inflows into commodity Etfs in both the Americas and EMEA.
When excluding global GTR net outflows of $1 $6 billion alternative net long term inflows wherever $9 billion.
Strength of our alternatives platform can be seen through the flows that has generated over the past five quarters with net long term inflows totaling nearly 27 billion, representing a 12% organic growth rate over this time when excluding the impact of the GTR net outflows.
Now moving to slide seven as Marty noted earlier, given the strong growth in our Etfs and other index capabilities. We wanted to provide a little more detail more detailed view on the business.
With over 15 years of experience managing indexed assets and a team of seasoned ETF professionals and different strategic region.
Investors Index business has always differentiated itself.
The innovative and value added nature of our products exam.
Examples of this include first to market types of products like the Invesco senior loan ETF distinct their families of Etfs like the low volatility suite, the bullet share Etfs and our diversified range of commodity pool.
We created the fast growing <unk> innovation suite, just a little over one year ago and it has grown to $5 4 billion at the end of the first quarter.
We managed $528 billion in Etfs and other index capabilities.
The platform is diversified in terms of strategies asset classes and client geography.
Over the last 12 months net inflows into Etfs and other index capabilities were $87 billion of.
A 21% growth rate net inflows into global Etfs over this period were $66 million, which was a growth rate of 17% and new fees from these flows were $130 million a 16% increase over the prior 12 months.
Now turning to slide eight over the past five quarters. The ETF industry has seen over one trillion dollars of net inflows of 12% growth rate.
Over the same period invesco, 17% growth rate has exceeded that of the industry and.
In addition, our market share flows has exceeded our market share of ending AUM for four of the last five quarters, increasing our overall global ETF market share 40 basis points over this period to four 9%.
Moving to slide nine investment the fourth largest ETF AUM advisor globally.
Our platform is much more diverse and Jeff both beta we continue to innovate our product line focusing on specialized strategies in growth areas, such as smart beta commodities fixed income and more niche traditional beta.
These capabilities carry higher fee rates compared to both beta fee rates.
On a fee basis, we ranked fourth in the industry with a five 6% market share of annual fees.
Given the Commoditized nature of both beta products, almost 60% of the industry ETF AUM carries a fee rate of less than 10 basis points.
In contrast, our ETF capabilities are anchored on strategies that help investors achieve targeted investment goal the value add proposition of our ETF business as expressed are sought after products.
You exclude the Q2 Q over 90% of our ETF AUM has a fee rate 10 basis points or higher but the average fee rate being 33 basis points.
Our ETF flows in the first quarter, we're also differentiated with over 80% of our ETF net inflows being in products that carry a fee rate of 10 basis points or higher.
Looking at net flows in these higher fee products, our market share was nearly 14% of the industry almost three times, our market share of ending AUM.
<unk>.
Slide 10 shows that the ETF industry is expected to almost double in size to 18 trillion dollars or 18% annually by 2025.
<unk> is well positioned to continue to gain market share with our global scale as well as being a leader in commodities smart beta fixed income and our focus on innovative and thematic offerings such as the <unk> innovation suite and ESG products, we are positioned to capture client demand around the globe.
Our ability to capture flows in excess of our market share is driven by a number of factors, including our understanding of markets and clients multi decade, ETF relationships on institutional and wealth management channel.
Fast growing European ETF product lineup that is now the second fastest growing ETF business in the region and our ability to build loyalty with a new generation of retail investors.
Finally, the brand recognition of the Q2 to elevate to invest good visibility in the global ETF market. The <unk> product has become the fifth largest ETF globally. Its popularity has spurred growth in the rest of our global ETF platform and laid the groundwork for the launch of adjacent fee generating products as part of the <unk> innovation suite.
We launched that suite in October 2020, and it has been highly successful growing to $5 $4 billion by the end of the first quarter as I previously noted.
Now moving to slide 11.
Our institutional pipeline was $29 billion at quarter end consistent with the prior quarter level pipeline remains strong and it's been running in the $25 billion to $35 billion range dating back to late 2019.
Pipeline also remains relatively consistent to prior quarter levels in terms of fee composition.
Overall, the pipeline is diversified across asset classes and geographies our solutions capability enabled 30% of the global institutional pipeline and created wins and customized mandates. This does contributed to meaningful growth across our institutional network.
Turning to slide 12 market volatility had a significant impact on our first quarter net revenue.
Is most evident in the $93 million decline in investment management fees from the fourth quarter as noted on the slide.
Prior quarters, leading up to the first quarter, we had been generating strong year over year net revenue growth growing at a 17% rate in the second half of 2021. This was being driven by both strong markets and organic growth at.
That's the first quarter unfolded pressure from market volatility negatively impacted net revenues as a result, our net revenue were essentially flat year over year.
We did see improvement in money market fee waivers during the quarter as short term rates increased and the fed raised rates 25 basis points in mid March the net money market fee waiver impact had been running in the $20 million to $25 million range per quarter, the impact declined to $12 million in the first quarter we.
We expect the impact will decline to near $5 million in the second quarter and by the third quarter, we expect little to no impact from money market waivers.
Total adjusted operating expenses were up about $10 million or 1% as compared to the first quarter of 2021.
$6 million of the increase was due to certain changes to the pricing of transfer agency services that we provide that we provide to our funds, which went into effect, which went into effect in the third quarter of last year.
The increase impacted property office and technology expenses, which was offset by a corresponding increase in service and distribution revenue.
Taking this into account adjusted operating expenses were essentially flat year over year.
<unk> and employee compensation were offset by higher marketing and G&A expenses, partly due to higher reopening activity in these areas as compared to the first quarter of 2021, when there was no travel.
Going forward the degree of activity in these areas is expected to increase as travel continues to come back.
Moving to slide 13, we're very close to our goal of achieving $200 million and net savings this year and the first quarter, we realized an additional $6 $4 million in cost savings three.
$3 million of the savings was related to compensation expense of $3 million related to a reduction in property expense as we continue to right size our facilities portfolio.
The $6 million in cost savings of $26 million annualized combined with the $167 million in annualized savings realized through 2021 brings us to $193 million in total are 96% of our $200 million net savings expectation.
In the first quarter, we incurred $22 million of restructuring costs related to this initiative in total we've recognized approximately $240 million of our estimated $2 50 to $2 70 $275 million in restructuring costs associated with the program.
We expect the remaining restructuring costs with the realization of the program can be up to $35 million.
As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Now moving to slide 14, adjusted operating income decreased $8 million from the first quarter of last year to $495 million driven by the factors I previously noted.
Adjusted operating margin was 39, 5% slightly lower than the first quarter of last year.
EPS was <unk> 56 cents versus <unk> 68 cents a share last year with the main driver being lower non operating income.
In the first quarter of 2021 equity in earnings of unconsolidated affiliates was $37 million favorably impacted by the improving CLO valuations at the time as compared to $4 million in the first quarter of 2022.
Other gains and losses declined $30 million from last year to a loss of $20 million in the first quarter of 2022, driven by lower Mark to market valuations of our seed capital due to negative market performance.
The effective tax rate was 24, 2% in the first quarter.
We estimate our non-GAAP effective tax rate to be between 24 and 25% for the second quarter of 2022. The actual effective rate may vary from this estimate due to the impact of nonrecurring items on a pre tax income and discreet tax items.
Slide 15 illustrates our ability to drive adjusted operating margin expansion against the backdrop of the client demand driven change in our <unk> and the resulting impact on our net revenue yield our operating margin two years ago in the first quarter of 2020 was 36% at that time, we reported a net revenue yield ex performance fees and excluding the Q2.
<unk> of 41 eight basis points.
In the first quarter of 2022, our net revenue yield declined five two basis points to 36 six basis points, yet our operating margin has improved to 39, 5%.
We've been building out our product suite to meet client demand and client demand has been skewed towards lower fee passive products as evidenced by the mix shift between active and passive.
Realizing our business mix is shifting we continue to be focused on aligning our expense base with these changes. This has enabled the firm to improve and maintain a strong operating margin. Despite the client demand driven decline in net revenue yields.
Now a few comments on slide 16, our balance sheet cash position was $1 $3 billion of March 31, and approximately $708 million of this cash is held for regulatory requirements.
Our cash position improved from the first quarter of 'twenty, one even as we deploy $200 million in cash to fund share buybacks in the first quarter.
Our leverage ratio as defined under our credit facility agreement with 0.8 times at the end of the quarter and if you choose to include the preferred stock the leverage ratio was two five times, but being substantial improvements in our leverage profile over the past year.
As Marty noted earlier, our stronger balance sheet and financial flexibility put us in position to capitalize on an economically attractive opportunity to early redeemed the $600 million of senior notes that have a maturity date of November 30 of this year.
As short term interest rates increase in the first quarter the make whole related to an early redemption of the debt became attractive enough to provide a financial benefit to redeem the data early and it will be fully redeemed on may six.
This will save us approximately $11 million in interest expense over the period beginning in early may through what would've been the November 30th maturity date.
The make whole and other fees will be approximately $5 million based on current indications and these will be recognized at the time of redemption, but the savings and the fees will impact interest expense.
With respect to our capital strategy, we are committed to a sustainable dividend and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases. As we stated we intend to build towards a 30% to 50% total payout ratio over the next several years.
Yeah.
We completed the previously announced share buybacks of $200 million in the first quarter and our board approved a 10% increase in our quarterly common dividend.
Overall, we believe we are making solid progress in our efforts to improve liquidity and build financial flexibility and our first quarter results demonstrate.
Demonstrate that progress.
We remain focused on executing the strategy that aligns with our key areas of focus continuing to invest ahead of client demand in these areas at the same time, we're focused on optimizing our organizational model and disciplined expense management.
This approach has resulted in a stronger and more resilient operating margin. This is also facilitated stronger cash flows further strengthening our balance sheet and driving the improvement in our leverage profile, putting us in position to capitalize on opportunities such as the early debt redemption.
As we look toward the future Invesco is in a strong position to deliver value over the long run to all of our stakeholders.
And with that I'll ask the operator to open up the line for Q&A.
Yes.
As a quick reminder, if you'd like to ask a question. Please press Star then one on mute your phone and record unit included when prompted.
If you'd like to withdraw your question you May press Star two.
Our first question comes from Brian Bedell with Deutsche Bank. Your line is open.
Thanks, very much good morning, I won't spend the money.
Good morning.
Maybe just to start with the ETF presentation.
For all of that detail I'm, just thinking about that.
The sort of the base fee organic growth potential in the ETF business.
How you called out.
The higher fee rate and the product.
Product development.
Okay.
About <unk>.
Yes.
Runway for further product development in this in this area, whether that's you know coming mostly from the innovation side or just add ons to other products, maybe including Sematic Etfs and sort of your optimism maybe for <unk>.
Overall ETF fee rate, excluding the triple is huge.
Potentially increase overtime.
Yes, I'll make a couple of comments.
If you just look at the franchises I also want to reminisce evolved enormously over the last.
From what we got into 2006, it is an absolute source of strength.
Our fundamental strength really is the non cap weighted part of the business.
Product innovation and development is fundamental to successful ETF business. So we anticipate that to continue.
And again I think the results speak for themselves.
To continue as we go forward.
Helpful. Brian .
That's helpful.
I'm sure there's a lot more to come in the future and then maybe just.
The geopolitical backdrop, what you're seeing obviously a lot of cross currents.
And China of course with Lockdowns are accelerating and then of course the whole situation in Europe , maybe if you could just comment on.
How youre seeing flow trends evolve move into the second quarter now that this is going on longer than it was in Europe , whether you're seeing a difference in the UK versus the continent in terms of in terms of sales growth and in terms of whether the geopolitical situation there is affecting.
One region.
Versus the other.
Yeah look it's a great point and it is a contrast, right, but there is definitely a sentiment headwinds both in China and in Europe , and I'd say largely for different reasons right is really the Russia, Ukraine situation, which as you know quite acute on the continent and in the UK. It has.
I'd say.
First element was a slowdown.
People sort of moving more course risked off we'll just have to see as we go forward is just so hard to predict.
Is it sort of settles in.
So a horrible situation but.
You could see some sort of balanced out there with China. So different I mean, it is COVID-19 and.
Yes.
During the worst situation with Covid.
And that is definitely impacted sentiment and it is impacting flows from really equity products.
Products and we continue to be in flows there.
But again I think it's all good.
Economy.
The leadership is very focused on them they want growth they need growth or anticipate theyre going to do what they need to support.
The growth in China.
And I would say picking up on your question of do we see a difference in sentiment sentiment between the UK and Continental Europe .
I don't think I would point to a difference in sentiment related to the geopolitical.
Issues going on there.
If you look if you kind of Peel back the results from the first quarter the impact of the outflows in our GTR product.
Felt most acutely in the U K as the majority of that is based in the U K.
Some headwind and continental Europe .
But in terms of sentiment a little bit of a shift a bit of a risk off sentiment and a shift in the commodities, which is certainly driving some of the strength in our ETF flows in the first quarter, but.
You know I wouldn't point to any major differences between the two areas.
Great. That's good color I'll get back in the queue for a couple of follow ups. Thanks.
Thank you.
Thank you and our next question comes from Brennan Hawken with UBS. Your line is open.
Good morning, Thanks for taking my questions.
So curious about the.
How should how we should think about fee rate pressure I know, it's always a tricky one.
To think about but maybe something that might help a little bit is to think about it tactically what.
What did you see in the trends through the quarter and then based upon what we've been seeing so far under the markets are.
And Paul It also not necessarily asking for a forward book, but maybe you know what was the exit rate and what are the general trends here, so far quarter to date and when we think about truing up in at least tactically.
I'll I'll do my best run undertake a stab at that it is.
It's rather difficult as you know.
Maybe I'll start with just a reminder.
That the net revenue drivers are always going to be organic growth mix of flows and AUM and market dynamics over.
Over the last year. We've also had the impact of money market fee waivers, which as I noted, we expect that to be going away.
But trying to unpack that and develop a view around where we see it going over the next quarter or two is very difficult maybe kind of again separating what are some of the trends. We see we look at in particular the decline.
And our active net revenue yield and we do provide some additional disclosures around active versus passive net revenue yield in the appendix of the presentation this quarter.
I think some of what we see there is just this divergent market beta where.
Both are emerging markets and China equities have underperformed relative to the developed market indices.
And so that put real pressure on our active net revenue yield and we've also seen outflows, particularly in developing markets and some of our other higher fee active equity products.
Experiencing inflows into active fixed income, which of course are going to be on the lower end of the fee range.
Then you look at the passive net revenue yield in some of the declines there and that's really a more I'd say recent impact of some of the really sizable low fee large institutional index mandates that we put into the AUM mix last year think I double O F.
As well as some of the growth of our Etfs in EMEA and the innovation suite, which while the innovation suite is fee generating it will be on the slightly lower end of our passive fee rates. So.
Those are some of the trends.
We're experiencing I think the biggest issue moving forward, we'll absolutely be market dynamics as I think about what we could expect in the second and third quarter.
And I would add to it.
The right question to ask but it continues to be focused on it and we as a team to but you have to ask the question at hand in hand with profitability and I think we've demonstrated that.
Yeah, we've been continuing to drive profitability.
With this movement.
<unk> and <unk>.
Internally and also talked about we continue to make sure our resources are aligned our right sized accounts, where we're seeing.
The profitability within the organization and again I think that look back from 2020 forward I think demonstrates that we've been able to do that and we intend to continue to do that too.
Okay, Thanks for that and Marty.
It's a great segue into kind of Tees up the next question, which is the.
The environment has been challenging.
Volatile certainly seems like there's less risk appetite.
Here at least in the near term. So how are you guys thinking about the expense base here.
Year.
Compensation trends seemed a little bit better than certainly we had been expecting or is that better than expected comp sustainable.
In the near term how should we be thinking about truing up our outlook for expenses and how are you guys thinking about managing it given the given the environment.
Yes. Thank you.
Couple of comments I also look I think you're hitting on the high points. The first thing you have to do to be successful.
Cost cut yourself to success here we've been.
Yes.
We've been very focused on it over the last few years as Alison has spoken too but really we're in.
Position, where youre driving the.
The resources against things that really matter for the future. That's what we've been doing and also in this environment of.
What matters to our clients and employees, ensuring that we're keeping that right balance where clients continue to have confidence in us as an organization and quite frankly, the talent in the organization to keep them energized.
Generating the results and so.
It is something.
We've continued to be very focused on will continue to do it.
But ensuring that we're being responsible lenovo.
Allison I'll pick up on mountain, Yes look some comments thanks Marty.
So a couple of things one just a reminder, our expense base is about a third variable and two thirds fixed so when we think about that variable component of the expense base.
It just can't react fast enough when you have a pretty strong market downdraft like what we experienced late February .
And through March and of course, we continue to experience that as we make our way through April . So it takes some time for that variable expense base to fully catch up.
To the lower revenue and at the same time, two thirds of our expense base is fixed and I think that's an area, where we've been spending a lot of time as you know the last couple of years really thinking about our overall cost structure.
And making some choices as we think about how to continue to shift that and lighten up.
The cost structure and we've made really good progress. We believe were the $193 million of that expense base really well addressed over these last couple of years getting back to your observations on comp.
You know as well managed because we've been just really thoughtful and disciplined around head count over the last year or so and so while there is seasonality in our compensation expense in the first quarter.
And it does tend to around 2000 $25 million higher than the fourth quarter.
<unk> was pretty well managed against that as we look at head count and of course the variable.
Part of our compensation expense reflects the lower revenue we experienced in the first quarter as well as I think about the rest of our expense base you see where we've continued to make some progress on our facilities expense, we will continue to address our facilities portfolio overall.
As we just think about.
Our footprint and the role the office plays in our future and take advantage of some opportunities there, but the other thing I'd point to is we've been experiencing that's very low to no travel environment for some time now and as I think about our expense base going into the second quarter and beyond I do expect we will continue to see some pickup in activity.
We saw some pickup in the fourth quarter and the first quarter.
You know we get the start stop as we all understand from country to country and region to region and we still remain completely closed in China. As an example, but we are seeing travel really start to pick back up and clients wanting to see us again across North America, and Europe , and so with that I expect a little bit of pickup in activity.
I do not expect us to get back to pre COVID-19 levels for a variety of reasons, but I do expect it to be to trend just a little bit higher from here long way of saying, while we do think there will continue to be this market pressure on revenue pressure and we will.
Be thoughtful and selective in managing our expense base, and but not knee jerk reactive because it's really important that we continue to invest for the business that we expect will be here a year from now despite some of the geopolitical tension we experience right. This minute.
Okay. Thanks for that very very thorough response, just one clarifying question Allison you made reference to reviewing the facility's footprint do you have any extra.
Timeframe for when you all might have an idea about what what that review will suggest for changes.
United States ongoing because leases are you know they're they're rolling.
And so as we have the opportunity to make decisions were being thoughtful and selective just given that we work in a different environment than we would have a few years ago. So that's going to be an ongoing opportunity and I point, just beyond our facilities portfolio to a lot of components of our expense base as opportunities arise to address that we're going to be very thoughtful about where we.
We continue to invest and where we may be able to free that up to invest somewhere else.
Thanks for all the color.
Yes.
Thank you and our next question comes from Glenn Schorr with Evercore.
Evercore Your line is open.
Thank you.
I'm curious.
Scene.
Different markets I'm, just curious on the higher rates.
And the impact on flows you've obviously mentioned again benefiting from the.
Floating rate bank loan product.
Some some flows into some index protocols people derisk.
You can hear me.
Full lay of the land on where the pluses and minuses are coming.
Impacted and the higher rates and what to expect as the fed does its thing because I think it's always.
A little more on the positive side than people expect basically brace for impact.
Hum.
There's some.
Moving parts. Thanks.
I'll make a couple of comments and Alison will also.
When youre hitting on really the topic I mean.
So where are we seeing flows I also want to be a high margin fixed income short duration bank loans.
We have a very strong commodity suite within the ETF business.
We've had that for a very long time, and it's really just in this market has become quite popular as you would imagine real assets is another warm direct real estate.
We need to be an opportunity for us.
Quite frankly, we're seeing marked improvement.
Our value equity capabilities yogurt sort of in an asset class for the last decade, or so but a lot of interest you will have to see where you are what the client demand is for that.
Strong investment performance coming out of occupancy so.
Again, what we're going to it's really the breadth of the product lineup that.
It's out of sort of one answer to the marketplace and.
I think we're well suited for the environment that we're going to go into it.
The only thing I'd add to that is just not surprisingly investors are going to be looking for.
More floating rate credit sensitive assets and that's really what you see driving the strength in our senior loan flows and where we would continue to see.
Demand and I think again, the breadth of the capabilities, we have they're well positioned to capture that demand.
Thank you and maybe just a follow up on related to mass mutual obviously and.
And even bigger owner now Keith.
And just what you're managing for the general account, what kind of flow as youre getting out of retail and what the future holds in terms of.
The future synergies between the two organizations.
Okay.
Sure I'll pick up so in terms of what we're managing for them, we manage about $5 billion on their broker dealer platform.
They have also committed over $1 billion to various invesco alternative strategies. So.
The relationship is I would say mutually beneficial and has the opportunity to continue to grow and expand from here as you know and they are a larger owner they continue to be very bullish on the overall profile of invesco and our opportunity to continue to.
Grow.
Market share and.
Position, our product capabilities to capture the demand that's out there so.
We're working with them really on both sides of the ledger as we think about the opportunity we have to manage more on their broker dealer platform and also the opportunity.
We have together to co invest in various alternative capabilities and strategies you want to add anything to that.
Again, it's a very strong relationship with strategically.
We're both looking for ways that we.
We continue to mutually benefit from our relationship as we go forward.
Yes.
Thank you for all that.
Thank you and our next question comes from Robert Lee with K B W. Your line is open.
Great. Good morning, Thanks for taking my questions.
Maybe a question on the great wall JV, So just wanted to.
Excuse me think about the economic impact of it obsoletes.
It's been a strong source of.
The flows in the last couple of years, even if it's slowing down right in the moment, but.
What's the right way to think of the economic contribution I believe most of the Noncontrolling interest is from the great wall JV or so we're trying to think of its impact is it as simple as just you know.
Adjusting that for your 49% share or is there.
Whether we should be thinking of it.
Yeah, Let me start with when you look at our non-GAAP results. We look at that in terms of in revenue you see 100% and then below the line we back out the 51%. We don't know so we can spend some time walking through that making sure that's clear, but that's how it's reflected in the P&L.
So you see a 100% on the top line, but by the time you get to the bottom line, we reflect 49% of our ownership.
Okay, maybe it's about your question, Rob well, Yeah, I guess, if I think of the 20 I guess my understanding was that not been $29 million Noncontrolling interest was mainly.
The 51% that flows you know with me was the great wall JV right. So that's the that's just from 1% yeah, Okay, Great and then.
Yeah go ahead, sorry, no no no.
Well please.
Sure.
Your comments sorry, no there was nothing else to add sorry go ahead, Rob, Okay, well just back and forth.
But sticking with the great wall JV and I know this has come up in the past and I know for a while you know you've been.
Looking at how do you get the majority stake in Q update us on that and more specifically given the understanding you have operational control of the JV and.
And you run it day to day year to year, but can you maybe update us what kind of maybe safeguards you feel like you have you haven't been able to get to the majority ownership still a minority ownership, even though you have operational control you know other other safeguards, we should be thinking of that kind of help protect your position.
And that joint venture.
Yeah, Let me make a couple of comments look you're hitting on the most important part.
From the beginning we've had management control and that's really why we've been successful.
And that is that has really been the competitive differentiator with us versus many of our competitors in the market.
The reason for not getting the majority in.
In and out on Covid is just not helpful. Right. It's just in Lockdown and every time that we start to get to it really was geopolitical elements I would say probably two years ago, and it's really been more of the Covid Lockdown right now and until that comes down.
Okay.
Yeah, we're not going to get we're probably not going to get it done for a few quarters, we'll just have to see how it goes.
The desire is there on both parties the pathway it is something that we.
We know what we want to accomplish.
We will in time, but I would not be worried about.
The risks associated with the <unk> relationship is very strong and very well.
Oh wait out for US is in August .
Okay.
Hey, great. Thanks for taking my questions.
Thanks, Rob.
Thank you and our next question comes from Bill Katz with Citigroup Your line.
Line is open.
Okay. Thank you very much thanks for taking the questions with William Blair.
So maybe just starting with the balance sheet, a little bit I. Appreciate the update on the debt for me and as you think about into the second half of the year can you talk a little bit about what your priorities might be how much sort of residual cash you're willing to run with on the balance sheet between sort of excess cash and record cash and then maybe the delta between <unk>.
<unk> debt repurchase versus share repurchases, just given where the stock is trading thank you.
Sure. So I'd say in terms of priorities just overall, our capital priorities are consistent and just.
First and foremost reinvesting in the business to support future growth, we continue to prioritize that and well and you've seen that and I think that's what's put us in a good position to.
Capture the flows we did in the first quarter, despite a really challenging environment.
Next is to maintain a strong balance sheet and then to return excess cash to shareholders. So I actually think we checked each one of those boxes nicely in the first quarter as we had the opportunity to further strengthen the balance sheet and return cash to shareholders through the dividend increase and share repurchases and as I think about moving forward and when we get on the other side of it.
Redeeming the stat.
And I'll point to the fact that we'll be using a combination of cash and <unk>.
Perhaps some draw on the revolver to early redeem that $600 million.
And so it does we have been building cash in anticipation of paying this debt off at the end of this year, we pulled it forward by six months and it's a bit of a challenging environment as well in terms of just cash flow generation being slightly weaker than we would've expected or hoped for and 2022, just given the market pressure dynamics that we're experiencing.
Through revenue.
Against that I think we will continue to be focused on building cash. So that we can be in an opportunistic position to reinvest in the business and to think about continued progress on the balance sheet. Our next debt maturity won't be until 2024. So we've got some time in.
In advance of that next $600 million maturity.
I think I missed the last part of your question I think you asked something about share repurchases.
And I was just trying to understand like is you should think about maybe second half of the year and you pay down debt and multi amongst will stabilize but how much residual cash you're willing to work with on the balance sheet and then when you sort of look at structuring your sub 20.
Your next step even without coming due until 2024, how do you think about just sort of buyback versus further husband capital.
Sure.
You know I think in general, we'd love to see cash be somewhere around and I'm going to use generalities here $1 5 billion or so that just puts us in a nice comfortable position beyond our regulatory requirements.
To have cash for opportunistic needs and also whether any downturns and I do think as we think about this year and we're cautious and not knowing what the environment might hold from this point forward we were.
We're watching closely and we're going to be we're going to err on the side of conservative.
As we think about the impact of market might have on our overall revenue dynamics and cash position. So I don't know if her husband in cash so much as being very thoughtful and prudent as we think about our balance sheet and keeping our balance sheet and a very strong position.
We're operating in a different environment than we were two years ago. When I think about the first quarter of 2020, and how much pressure that put on our balance sheet and on our profile overall, we're in a much much stronger position two years later because of the work that we've done and because of our prudent approach to the balance sheet and this would not be the time to back off that strategy.
This is a follow up and apologize a bit of a two part unrelated question just I might've missed your commentary Alison just on the sequential decline in the equity earnings line and then bigger picture question. Just as you look at your old spoke it can you talk a little bit about what you have coming in terms of opportunity for growth into maybe second half of this year.
Any flagship phones or just general general new product Initiations, and then could you sort of clarify how much you're sort of getting the tapping into the retail demand position I thought I heard 300 million. That's one of the cheap I heard some different thank you.
Let me take the first one on just in terms of equity in earnings. If you think about first quarter of 2021.
There was a gain of about $36 $7 million theft because of the CLO marks at the time. So you had just CLO mark to market moving in a pretty strong upward direction in the first quarter of 'twenty, one and compare that to this quarter, which was about $4 million. So just modest gains there, but again. This is all just mark to market unrealized gains and losses.
So that's the difference year over year.
As it relates to alternatives and opportunities going forward.
I'll continue to point to our private markets capabilities and what it is but the last couple of quarters talking about both in terms of real estate.
And our senior loan capabilities are certainly seeing both of them being demand right now, particularly the senior loan capabilities as we noted just given.
The investor move towards.
Short short term floating rate credit sensitive assets. It provides us a really significant opportunity for growth in that asset class.
For the balance of the year, but also our private real estate business does as well as we continue to grow our capabilities. There Marty you want to add anything there.
Got it.
And thank you all.
Thanks Bill.
Thank you and our next question comes from Ken Worthington with Jpmorgan. Your line is open.
Hi, Good morning, Thank you for taking my question.
Different parts of the real estate market has bounced back others are still struggling so I guess how're invest goes direct real estate portfolio. How is it positioned in performing here and it does look like that both AR and Invesco Asian, and Invesco U S. Direct fund have been in market more recently.
So how is fund raising going in those products, if they haven't yet wrapped up.
Maybe lastly here.
Outlook for real estate transaction fees, I think you called it out in the quarter as being I think 10 or $11 million in the quarter.
Are we back to normal for those transaction fees.
And if so what is normal look like from from here versus you know the depressed level that we saw.
More recently.
Thanks.
Alright, let me, let me try to take that maybe in reverse order on the transaction fee I think you're pointing to that $10 million.
Transaction fee that we noted is in other revenue and that's really a property disposition fee within private real estate.
So net inflows were about $300 million in real estate, but there's obviously transaction activity behind that and was pretty broad across the platform.
I think we commented on the acquisition activity was about $2 $1 billion in the quarter.
But the realization, which is what can trigger a property disposition fees was about $1 $8 billion in the quarter.
And so from time to time, you're going to trigger some of those property disposition fees I don't know if we could point to normal because it's going to be somewhat episodic in nature.
Depending on the nature of those.
Dispositions.
And then.
I'll add onto that it's important just to remember that a large percentage.
Of that.
Three realization doesn't actually leave Invesco is really redeployed into new properties.
And so I don't know if I'd point to that as normal or.
Or something we should expect quarter to quarter.
As I think about just again coming back then to the part of your question around our real estate portfolio, it's pretty well positioned and well diversified across the different real estate classes.
Multifamily.
Office.
Industrial retail.
We've obviously been quite thoughtful over the last few years, given some of the various pressures on some of those categories.
It is also well diversified across regions and it is a global business and so our strategy is not to be.
Too concentrated in any one particular area or asset class and I think there we feel like they are pretty strong growth profile growth dynamics for that one going forward.
Okay, great. Thank you very much.
Thanks Scott.
Yeah.
Thank you and our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks. Good morning, So wanted to follow up I appreciate the comments on the balance sheet and flexibility in the capital and priorities I guess, the one area that hasn't been discussed is just M&A and so curious about your appetite for potential M&A in this type of backdrop, you know alternatives or.
Private market, keeping those expanding that certain areas of focus or if it's in terms of priorities. This is just further down the spectrum and not really something you're focused on at this point.
[laughter].
It's a good question and I would really point to.
Right now <unk> been talking about on this call really private markets is a very important area for us.
Two fundamental sources from talking about our.
Our head is focused on growing those organically right now.
If there was an opportunity in the alternatives space complemented our current portfolio, we would surely be very open minded to it.
PD priority as we thought about M&A, but it's.
We're not waiting to continue to build that business, we're continuing to invest in it.
Okay.
Got it and then a follow up on just the institutional pipeline I'm curious just the solutions business. If you could talk about the kind of client profile that youre typically having success with and expand upon that would be most of the larger mandates last year, but you know kind of on the ongoing business and then within active equities.
It also has a little bit larger slice of the pie can you talk about what strategies or are driving are what the demand is on that.
Institutional pipeline that you guys disclosed.
Yeah, Let me talk about solutions, so it's <expletive> .
The client breadth is very very.
Broadly yes.
It's.
Corner office wealth management teams.
<unk> states using <unk>.
Solutions capability too.
Log large sovereign wealth funds around the world. So it really serves all different types of clients I'm doing.
Various different.
Oh.
Services for them.
We said has been fundamental to our success institutionally.
And very supportive of our.
Wealth management business also.
Yeah.
And I think then maybe coming to the other part of your question there.
Part of what we're seeing in terms of the growth in active equities in the pipeline would be driven by China and some of the institutional mandates that we're seeing through our JV there.
No.
I would point to I mean, you note the pick up in just the overall component of active equity not surprisingly as a result, I'd say the average fee rate of the won not funded pipeline while it continues to be within a range of.
You know high twenties, low thirties, and it's on the high end of that range as you would expect.
And our alternatives.
<unk> continue to grow there as well so the pipeline is shaping up quite nicely.
It's certainly a leading indicator we believe of our.
Future AUM growth.
And we're pleased with how that shake shaping up and the pull through this quarter was a little bit lower.
The unusual somewhat in the normal range, but lower as we just saw.
Some pushing of of those mandates out given some of the geopolitical risks and a little bit of a pause on that but the pipeline itself is shaping up quite nicely.
Great. Thank you.
Thank you. Our next question comes from Patrick Davitt with.
Thomas Research your line is open.
Hey, good morning, guys just one.
On the ETF disclosure.
Obviously that you highlight in the deck is a great position to be in.
Thanks for the question.
The funds are lagging the broader ETF industry in terms of seeing more compression.
To what extent are you seeing pressure from competitors on those higher fee products in the ETF side and second what gives you confidence that those higher fee rates are defensible in the long rate.
We see with other Etfs.
Like Etfs.
Yes.
So look we're the.
Yeah.
With fee pressure really comes in bulk data right, where there is.
Any number of competitors and it's easy to get into obviously is dominated by a few.
There's just been less of that.
The industry once you leave that and it's largely because there arent.
Many duplicate Etfs.
We're generating the returns.
The results that clients want and I would say as long as clients are fueling.
Fueling theyre getting value for the Etfs the fees will stay in place and the bulk beta side, there's just very little.
There are very few ways to compete other than through fees and in the space in which we operate there is the opportunity to differentiate.
So I don't know that we would say the fee pressure is lagging because you really can create a differentiated product offering there.
Thanks.
Okay.
The next question comes from Michael <unk> with Morgan Stanley .
Hey, good morning, Thanks for squeezing me in just maybe coming back to expenses I think Allison you mentioned the expense pieces, one third variable to fixed I guess, where would you like to see that over time and what's the opportunity to shift more of the expense based variable and what actions might be able to be able to take.
I would always love to see it go more towards variable.
And if we had that opportunity we will push everything we can but it's not totally realistic.
So I think the opportunity. We have is just really longer term and it's broader based as we think about the fact that our business continues to shift and you see that through everything we've discussed this morning and in the real demand for our passive capabilities, it's creating a fundamental shift and just the revenue dynamics of our business and against that we've got to be very thoughtful about <unk>.
<unk> the chassis of our expense base.
And to some elements of that are going to be fixed, but we've got to address even the fixed components.
Really reflect where demand is today and where we expect it's going to continue to be 345 years from now and where we have the opportunity to Bury belies the expense base, we well.
Compensation as a pretty highly variable component of our expense base. We are a people driven business and we will continue to be a people driven business and so that gives us opportunity, but we're thoughtful about how we use that opportunity as well.
So it's hard to say exactly where else. We can go but I think the biggest thing. We can do is continue to address some of our fixed costs.
I'll point back to the property portfolio as an example of that as we think about facilities and the opportunity we have to take some fixed cost out and that's how we're thinking about really adjusting the operating expense base going forward.
And just given some of the changes that you've made to the expense base already I guess, what would you expect the pace of expense growth to be over the next few years, assuming flat markets.
That's hard to say of course, given the inflationary environment, we're operating in and I think in a lot of wage inflation doesn't hit us in quite the same way it hits other industries, but I'm not sure we felt it entirely yet either all point to travel as an example of that I think.
The inflationary pressure on travel is going to find its way back into our expense base and that of others. I just don't know how long that environment, what might persist or whether or not it resets to some new level that we have to contend with I think we can manage our expense base reasonably well.
Again, putting aside market and the real unknown is just the overall macroeconomic environment and the inflationary impact on the expense base and I think that's the bigger probably pressure I'm not going to call. It rests with upward pressure on our expense base as we think about just managing our business going forward.
Great. Thank you.
Okay, well. Thank you very much I appreciate the engagement and the discussions and have a good rest of it I much appreciate it.
Yeah.
Yeah.
Thank you and that concludes today's conference you may all disconnect at this time.