Howards Marks is a billionaire investor and the founder of Oaktree Capital Management, an investment firm that recorded over $8.4 billion in U.S.-listed common stocks in its 13F filing for the fourth quarter of 2022. Below is a chart of the top holdings of Oaktree Capital as of the quarter's end:
Marks is a value investor at heart, but also a contrarian. He is not afraid to bet against the crowd and in fact is known for his style of “fishing where other people aren’t."
In the fourth quarter of 2022, Marks loaded up on a number of Special Purpose Acquisition Companies, or SPACs, which have declined in popularity after popping up everywhere in the bull market of 2020. Let's dive into some of the SPACs that Marks recently bought, as well as one of my favorite stocks from his latest 13F.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
SPACs
SPACs are basically an investment vehicle or “blank check company” which is used to shortcut the lengthy and expensive process required for a traditional IPO. These SPACs don't have any business in and of themselves; they raise capital and then look for a company with actual operations to merge with.
In the fourth quarter of 2022, Marks' firm loaded up on ~11 SPACs, many of which were newly formed in 2022. Given these SPACs are pre-merger, there are not many details to talk about, apart from the management, capital raised, etc. A bet on a SPAC is a bet that the managers of said SPAC will be able to complete a favorable acquisition.
One SPAC Oaktree purchased was Hainan Manaslu Acquisition Corp. (HMAC, Financial), which was incorporated in the Cayman Islands in the third quarter of 2021. In an SEC filing, the company states that it is open to “any business, industry, sector or geographical location," but they do wish to invest into areas which “compliment” management's background.
In this case, CEO Zhou Zhifan has vast experience in the investment banking and private equity industry across China. The Chief Investment Officer (CIO) has experience as a general manager at a venture capital investing fund, Zhejiang Venture Investment Group, based in Hangzhou, China. Therefore, I would expect this SPAC to offer a play on the emerging Chinese equity market.
In an SEC filing, management announced its key criteria, which include companies which target “massive consumer segments” with “high growth potential." In addition, it is also looking for products targeting the “younger generation” known as Gen-Z, with a scalable business model and free cash flow potential. From this description, I immediately think of technology/software companies in China that use algorithms like TikTok.
Oaktree Capital purchased 400,000 shares of Hainan Manaslu Acquisition Corp, which traded at an average price of $10.07 per share during the quarter, which is close to the starting floor price of the SPAC model (which is $10 per share).
Another SPAC Oaktree purchased was TenX Keane Acquisition (TENK, Financial). This SPAC went public in October 2022 and raised ~$66 million. This SPAC aims to focus on target businesses in Asia, but excluding mainland China. Therefore I am assuming it will focus on emerging market opportunities such as those in Vietnam, Thailand and perhaps Singapore. Oaktree Capital purchased 135,000 shares of this stock at close to its base level start price of ~$10 per share.
Oaktree also bought shares of Mobiv Acquisition Corp. (MOBVU). This SPAC was formed in 2022 and aims to target businesses in the electric vehicle (EV) sector, as well as those in smart mobility. Interestingly enough, this company is looking for businesses across “any region," but has specifically excluded China, Taiwan, Russia and Iran. Oaktree Capital purchased 245,000 shares near the ~$10 per share start price.
Kilroy Realty Corp
While Oaktree was mostly buying SPACs in the fourth quarter of 2022, it did buy some normal stocks as well, such as Kilroy Realty Corp. (KRC, Financial). This is a Real Estate Investment Trust, or REIT, which owns a variety of real estate across many sectors from commercial office space to life science facilities. The business focuses mainly on the Greater Los Angeles area, as well as San Francisco Bay, Greater Seattle and Austin, Texas. It operates in heavily populated, highly valued and rapidly growing areas. Developments include the 36-story Indeed Tower in Austin, Texas as well as 501 Santa Monica Boulevard, California and Menlo Point in Menlo Park, California.
The company still does development work and has approximately six large scale developments under way, which includes over 1 million square feet of office and life science space in San Francisco and San Diego in addition to 193 residential units in Hollywood California.
Its growth strategies include its “capital recycling” strategy, in which funds generated are plowed back into investments, in addition to its low-cost access to development finance and seasoned management.
Improving financials
Kilroy reported solid financial results for the fourth quarter of 2022. The business reported $284.3 million in revenue, which grew by 9% year over year and surpassed analyst expectations by $6.17 million.
For the full year of 2022, the company generated record revenue of over $1 billion for the first time ever. This was driven by a solid 93% occupancy rate, which means its buildings are in high demand from tenants.
The business also generated record leasing volume in Q4, with 328,000 square feet of new and renewed leases signed.
Its earnings per share for the quarter was $0.45, which did miss analyst estimates by $0.01. However, as Kilroy operates as a REIT, so its funds from operation (FFO) is often a better measure of profitability. In this case, the company reported FFO per share of $1.17, which increased by a rapid 11% year over year.
Kilroy is also in a strong capital position with $1.7 billion in total liquidity. This includes $290 million in cash and cash equivalents. In addition, its leverage is fairly reasonable with a net-debt-to-Ebitda ratio of 6 and a BBB credit rating.
Now of course, interest rates are rising which is a major risk for many real estate developments. The good news for Kilroy is none of its debt matures until the fourth quarter of 2024, and 95% of its debt is unsecurted.
The stock pays a solid forward dividend yield of 5.64%. This dividend is well covered at a 46% payout ratio and has grown at a steady 5.1% compounded annual growth rate over the past seven years.
Valuation
Given Kilroy is a REIT, the best way to value it is using the price-to-FFO ratio in my opinion. In this case, its forward price-to-FFO ratio is 8.47, which is over 42% cheaper than its five-year average.
Wall Street analysts have a consensus target price of ~$47.47 per share compared to the market price of $38.21 per share at the time of writing.
Marks added 235,000 shares to his firm's investment in the stock in the fourth quarter of 2022. During the quarter, shares traded for an average price of $41.18, which is slightly more expensive than where the stock trades at the time of writing.
Final thoughts
Marks is a tremendous investor who is not afraid to go against the crowd. SPACs are currently out of favor with investors, but he has actually invested into these areas with many of the SPACs focusing directly on China and Asia.
It should be noticed Marks may also have purchased “no lose” warrants, which can be reclaimed should the price of an SPAC drop below $10 per share. Either way, this is an interesting development. Oaktree has also balanced these venture capital style investments with a secure, high dividend paying investment in Kilroy Realty Corp.
