India's Biggest Landlord

Sitting with Tuhin Parikh in Blackstone Advisors India's 5th floor office in the iconic Express Towers in Mumbai's Nariman Point offers a peek into how the private equity (PE) giant thinks about real estate. Express Towers, designed in 1972 by renowned architect Joseph Allen Stein, is a Mumbai landmark that houses blue-chip companies such as McKinsey & Co., Indian Hotels Company, Merrill Lynch, EY, law firm Shardul Amarchand Mangaldas & Co., among others.

Parikh, who is senior managing director and oversees the real estate business, says when Blackstone bought Express Towers in 2014 for $150 million, it was a mess. Tenants had installed their own box air-conditioners — which leaked on walls and were aesthetically galling — as centralised air-conditioning was in a bad shape. Blackstone replaced the plant and gave customers the option to move to centralised air-conditioning or shift their air-conditioning units to one side of the building. It revamped the façade, added new sitting areas in the lobby, created security throughways from entrances and spruced up the elevator lobby. The older elevators would break down often and were replaced. Parikh brought new staff to manage the facility while retaining ground staff who knew the facility in and out.

A mosaic mural on the ground floor was in a poor condition. There were suggestions to remove it. Blackstone learnt that it was made by none other than Padma Shri Nelly Sethna. It opted for restoration. Now, the building even has emergency preparedness, including a 24X7 ambulance service on campus, says Vijay Datwani, an executive with Amarchand Mangaldas who has been working on the premises for 20 years. The makeover, say experts, cost ₹60 crore, a huge expense for an asset that had cost Blackstone around ₹900 crore. Was it worth it? The point, says Parikh, is that Blackstone commands ₹270 per square foot for Express Towers while Mittal Chambers across the road costs ₹175 per square foot.

A similar approach worked for Mall of Amritsar. After its acquisition in 2015, Blackstone upgraded the facility by bringing in brands such as H&M, Nykaa, Under Armour, Burger King and KFC. Then, it upgraded the infrastructure by overhauling lobbies, plaza, washrooms, food court, external landscape and façade. In the last three years, rent has grown from ₹43 per square foot to ₹60 per square foot and occupancy from 65% to 93%. Same-store sales growth has gone up from 3% to 9%, say Blackstone executives.

The quality premium is not a coincidence but a result of years of carefully crafted strategy that Blackstone has been following ever since its India entry in 2005. One of its pillars, say real estate analysts, is sticking to ready assets and avoiding projects under development even if that means paying a premium. Multiple tenants in trophy assets such as Express Towers reduce concentration risk, unlike in the West, where most properties have one-two tenants.

The approach, combined with aggressive acquisition of marquee assets, has helped Blackstone build a 125.5 million square feet realty portfolio to emerge as India’s largest corporate landlord. This includes office portfolio of 81 million square feet across 38 assets in seven cities. That leads No. 2 NCR-based DLF’s 37.5 million square feet, Mindspace’s 31.3 million square feet, Canadian PE firm Brookfield’s 42.6 million square feet and Bengaluru-based Prestige Group’s 18.7 million square feet. Besides office spaces, it owns over nine million square feet of retail space under the Nexus malls portfolio. Blackstone is also India’s largest logistics warehousing company with 35.5 million square feet space after the recent acquisition of Embassy Industrial Parks. It also runs a huge real estate investment trust (REIT), Embassy Office Parks, part of its commercial realty portfolio. A REIT pools money from mostly small investors and invests in real estate assets.

Blackstone’s India interest, however, goes far beyond real estate. The PE arm sports an enviable portfolio of majority-owned companies such as Mphasis, Piramal Glass and Essel Propack (EPL). This makes Blackstone one of India’s largest private investors and top 10 business houses in the country.

Real estate, though, is where it has been making headlines. Its real estate shopping list of just last five years includes Embassy Industrial Parks’ (2021) 10 assets totaling 17 million square feet across five logistics hubs; Cessna (2021) 4.2 million square feet office asset on Outer Ring Road, Bengaluru, India’s technology hub; Indiabulls portfolio (2018, 2019), including trophy office assets in Mumbai city centre totalling 3.3 million square feet completed space; Pune International Convention Centre’s (2017) two million square feet of mixed-use asset comprising 0.9 million square feet Grade A office space; one million square feet trophy mall in Navi Mumbai; a 414-key J.W. Marriott hotel in Pune; 0.8 million square feet city centre mall in Hyderabad; One BKC (2019) 0.7 million square feet and 0.9 million square feet recently completed office tower Seawoods Grand Central (2017). The shopping was supported by partners Embassy Office Parks (REIT), Prestige Estates, Panchshil Realty, Indiabulls and Salarpuria.

Industry experts say what separates Blackstone, or “Bx” as it is referred to in-house, from others, is its “business-builder approach” that runs through all its activities, including real estate. “I’ve been dealing with Blackstone for years and have seen how they came here, started off with a bang and then went through difficult times to being almost written off,” says Ajay Piramal, chairman, Piramal Group. But Blackstone stuck to its path. “Since then, they have taken bold calls and those have paid off, whether it was investment in real estate when everyone was pulling down the sector or in other businesses. Not only do they bring in finance but also operations. India has been good for them and they have also been good for India,” adds Piramal.

Parikh elaborates. When Blackstone started in India, there was no concept of institutional landlord. Owners of properties, he says, never saw ‘tenant engagement’ as part of their service offering. Now, it’s part of RFP (request for proposal) for most bids, he says. Tenant engagement refers to user experience, such as amenities and services that foster a sense of community through networking and events and can include parks, cafes, gymnasiums, yoga centres and gardens.

“Blackstone has been at it for a while in India. The whole effort spearheaded by their team has been executed slowly and steadily,” says Zia Mody, co-founder and managing partner, AZB & Partners, which once had an office in Express Towers.

Experts also point at Blackstone’s steep learning curve. “It had first-mover advantage at entry when foreign direct investment (in real estate) was first allowed. It took them three-four years to figure out the market. Once it did, it didn’t hesitate to make bold bets,” says a real estate expert. “They made regional bets with Panchshil in Pune and Embassy in Bengaluru. The logic was that there would be more upside and growth with a regional player than with someone who was already national.” The analyst adds Blackstone will now likely start acquiring shopping malls that others may be looking to sell, something that most other realty players will avoid given that the retail sector has not recovered fully from the impact of the pandemic. With strong cash flows and deep pockets, it can back up its bets. Zia Mody says Blackstone has also gained in deal sophistication over time. This perhaps explains why it has stayed away from residential real estate, which has had a reputation for regulatory hurdles and project delays. Though, it has often avoided projects under construction or development and operated through investee companies which know the lay of the land. Parikh says Blackstone has still constructed around 30 million square feet office space and four million square feet warehouse space across nearly 50 developments.

So, what next? Has rental income been hit in last couple of years due to rising trend of work from home, which may persist for a while? “Real estate in India is a tale of two industries, IT and new-age technology. Companies in these fast-growing sectors want huge space in anticipation of post-pandemic recovery. Last year, Blackstone leased out 7.5 million square feet, approaching the nine million square feet leased pre-Covid, and collected 100% in rent,” he says. “Rates may have temporarily declined in Mumbai but this isn’t the case in Bengaluru.” Blackstone recently signed a deal with gaming unicorn Dream 11 for office space at Bandra Kurla Complex, he says.

The Business Builder

Even though it started the India foray with real estate, its biggest business is PE, where it has invested $10.64 billion so far in nine companies. The portfolio includes Mphasis Ltd, Sona BLW Precision Forgings, EPL and Piramal Glass in the listed space with a market value of ₹96,277 crore ($11.8 billion). The unlisted investments include Aadhar Housing Finance, VFS Global Services, Ask Investment Managers and Simplilearn Solutions with combined net worth of ₹3,722 crore ($500 million). There is also the Nasdaq-listed TaskUS with a reported market valuation of $3.5 billion.

The PE play is unique in many ways. It prefers dominant or controlling stakes in mostly listed companies. Amit Dixit, Blackstone’s head of Asia for PE, says the group applies its transformative approach to turn around companies into valuable assets. In Covid-struck 2021, Dixit invested $5.5 billion during January-April 2021 alone. This was sharply up from 2020, when Blackstone had invested $4 billion and reported exits of about $2 billion.

Last year saw some portfolio companies going for initial public offers. Electric vehicle component maker Sona’s shares rose 24% on listing day, with market cap cruising past over $2 billion. Aadhar Housing Finance is slated to go public in the near future.

If early mover advantage and turnaround skills drove dominance in real estate, in PE, it’s all about transforming companies. Take Mphasis. In 2008, EDS sold Mphasis and itself to Hewlett Packard (HP) for almost $14 billion. HP ran it as an independent listed Indian subsidiary, but there was a sense that it had overpaid, causing turbulence. Mphasis saw three CEO exits in less than two years. By 2012, HP’s own performance fell, which put pressure on Mphasis as it used to get more than 50% business from HP. Blackstone had watched the company for years and believed it had great customers, strong intellectual property in digital services and decent free cash flows. It moved in to scoop up the IT services company in 2016. Dixit made two strategic moves. First, Blackstone secured a long-term contract with Mphasis’ largest customer, HP, with minimum revenue guarantee. At the same time, it knew that in an export sector such as IT, Blackstone’s dozens of global portfolio companies could be potential customers. He roped in an A-Team. CEO Nitin Rakesh had a free hand. He was aided by Marshall Lux (senior advisor at BCG, ex-McKinsey), Dave Johnson (ex-IBM), Amit Dalmia (ex-HUL) and Paul Upchurch (ex-Accenture, Nielsen). The result: Mphasis’ valuation grew from $1.4 billion to $5 billion within four years as cloud computing took off and demand for tech services surged in last two years. In December 2021, it was $8 billion. Dixit wants it to touch $10 billion in the next four years.

EPL, bought in 2019, is also undergoing a serious makeover. Blackstone has recently hired industry veteran Anand Kripalu as CEO and Parag Shah as CFO. It has added top talent on the board, including advisors such as Uwe Roehrhoff, ex-CEO of Gerresheimer, and D.S. Brar, formerly of Ranbaxy. Blackstone has implemented Project Phoenix, a company-wide margin expansion programme focused on judicious price increases, product mix improvement, cost productivity enhancement and improved sourcing. It is also tapping global markets, including Brazil. Investors are watching. At least seven new equity analysts have started tracking the stock.

Experts expect more action in PE considering the huge firepower Blackstone has accumulated recently. It’s BCP Second Vintage PE Fund has raised $11 billion, almost three times the amount raised by the First Vintage PE fund in 2018 ($4 billion). Like the first fund, it will focus on investments in India, China, Japan, Korea, Australia and Singapore. Dixit, an IIT, Stanford, Harvard alumnus, was was promoted as head of PE for all of Asia last year. “The strategy is, first be sector-specific, and then become builders of businesses, which means be a large shareholder and then have a game plan on how to go from point A to point B. If you succeed in growing the business, returns and exits will follow,” says Dixit. “We only buy what we can build, or we won’t buy it. We need to have deep conviction. We will not be a passive minority investor,” he adds. “The key difference between first and second funds is that the second is more diversified in terms of geographies.” It will also focus on new-age companies, which have been largely missing from the portfolio till date, along with healthcare players.

Where Are New-Age Firms?

A glaring gap in Blackstone’s portfolio is new-age companies such as Nykaa, Zomato and Paytm, which have got attention because of bumper stock market debuts. Dixit, however, emphasises that technology has been the single biggest investing theme for Blackstone in India. “More than half of our office portfolio is leased to global technology companies. India is a leader in this space through its incredible talent, which we see in migration of multinational companies to set up offices here and rising Indian leadership at global technology companies,” he says.

What about ESG (environmental, social, and governance) factors that investors are increasingly using to identify risks and growth opportunities? How does Blackstone India portfolio stack up on ESG parameters? Real estate, after all, consumes large amounts of water and is a high emitter of cement particulate matter. Most Blackstone buildings, says Parikh, are built to LEED standards, are landscaped with best-in-class designs and greenery, and have their own solar parks. “We also generate 300 MW power from solar parks at our buildings,” he adds.

“Blackstone believes ESG principles are crucial to developing strong, resilient companies and assets that deliver long-term value for investors. We are committed to integrating ESG within our investment process and operating philosophy. We view ESG as central to our mission of delivering strong returns for clients,” says Jon Gray, global president and COO, Blackstone.

Blackstone does not look at ESG in isolation but part of other measures to increase shareholder value. “While ESG is a vast and growing field, we have chosen to prioritise decarbonisation, diversity and good governance to create stronger companies and long-term value for our investors. We aim to lead by example and apply our insights to drive change across our portfolio,” he adds.

For Dixit, a portfolio company such as Sona, a maker of electric vehicle components, represents a shift from ICE-component players. EPL, one of the largest makers of plastic tubes and laminates for toothpaste companies, has taken steps to ensure total recyclability. Platina, a new material created by the company, is 100% recyclable, he says. “It will make 700 million tubes recyclable.”

There is another upside to ESG that goes beyond the warm and the fuzzy. Dixit explains how an ICE-engine company can be trading at 5X EBITDA, but if it’s EV-related, it will trade at 30X EBITDA. In the same way, if it’s into standard tech and coding, a tech company will trade at 8X EBITDA, but if it’s into cloud computing, it can touch 25X EBITDA.

The focus on ESG is clear. Recently, Blackstone roped in Dr. Jean Rogers, founder, Sustainability Accounting Standards Board, as global head of ESG, in addition to a dozen other executives to ensure coordination across 250 companies and 10,000 real estate assets that it operates. “I would say that this is an evolving space where regulators and NGOs are beginning to understand the complexities that we are dealing with. It is a Rubik’s cube,” she says. On India portfolio, she says, “I believe reporting frameworks in India will help Indian companies attract capital when they can show that they are adhering to globally recognised standards. We’re committed to decarbonisation initiatives in our Indian portfolio. We also work individually with companies to help them achieve their sustainability goals.” She adds Blackstone has been installing 7,00,000 solar panels across its real estate portfolio. “Companies are increasingly avoiding certain sectors or companies if they present risks,” she says.

However, it’s more than checking a series of boxes. “It also comes back to long-term or short-term vision,” says Dr. Lisa Hehenberger, professor at ESADE Business School and an expert in impact investing.

There’s universal agreement on that. “The bottom line is that a company has to seriously be thinking about its impact and what good or harm it can do through its activities — and then think of opportunity and mitigation. If it’s a heavy energy consumer, it needs to think about how it can lower its carbon footprint,” says Christine Anderson, who oversees Blackstone’s public affairs and ESG functions.

Rogers puts it another way. “ESG is the biggest movement affecting capital markets in modern portfolio. In last century, when we had this understanding that you could diversify risk, it was based on thinking about idiosyncratic risk, risk that you could diversify by getting into different sectors or by just picking a different company.” Fast forward to 2022, and the world is dealing with systemic risks that have not been contemplated in the last century to this extent in the way they affect portfolios, he adds. “ESG is just a systemic risk such as climate risk, social inequity, and so forth.”

“The significance of the opportunity is systemic risk to economy, to society, to portfolios; that is what ESG is tackling,” says Anderson.

In the last decade, Blackstone has built a reputation that has silenced critics. The next decade will test its ability to balance growth and profitability vis-a-vis sustainability.