Pa. firm's shareholders OK deal for BGE real estate unit Corporate Office Properties, an REIT, buying Constellation

Utilities

August 22, 1998|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Baltimore Gas and Electric Co. yesterday said goodbye to much of the real estate that had so plagued it throughout this decade, when shareholders of a Philadelphia-based real estate investment trust overwhelmingly approved a $204 million deal to buy the utility's development subsidiary.

The vote by Corporate Office Properties Trust's stockholders to acquire the BGE subsidiary is expected to result in significant future dividends for the utility because it will become the REIT's largest shareholder, with 41.5 percent of the combined company's stock.

But just as importantly for BGE, the deal for Constellation Real Estate Group Inc. allows it to fulfill a strategy set forth more than five years ago, when the utility foresaw the industry's pending deregulation.

"We've been looking to do something for a few years, and this became an attractive solution," said David A. Brune, a BGE vice president and its chief financial officer. "We want to focus on the energy business, that's where we want to deploy our capital."

With the sale, first agreed to in May, BGE also will be able to shed a division that has overall proved to be largely a disappointment to the utility. In the past year, for instance, BGE has taken $44 million in write-downs for its 2,500-acre Piney Orchard community in Anne Arundel County and for Church Street Station, a soured entertainment complex in Orlando, Fla. Neither project, however, is part of the Constellation sale.

But BGE believed that the timing to shed Constellation was right, because the deal comes as REITs such as Corporate Office Properties are flush with cash and hungry to expand their portfolios and geographic reach.

With Constellation, Corporate Office Properties' portfolio will grow by 18 office and retail projects totaling 1.8 million square feet, or 60 percent. Corporate Office Properties owns 31 projects totaling 2.9 million square feet.

"This is a defining event for our company," said Clay W. Hamlin III, Corporate Office Properties chief executive, after 99 percent of the votes approved the deal. "We will have the systems and a seasoned management team in place to achieve our growth objectives."

Constellation's projects, which are 95 percent occupied, are expected to add 11 cents a share to Corporate Office Properties' earnings next year. Corporate Office Properties also will gain Constellation's ownership stake in a property management company with KLNB Inc., which oversees 153 buildings and 16.2 million square feet.

Additionally, Corporate Office Properties will have the option to acquire 91 acres of Constellation land that could hold another 1.7 million square feet of space.

As part of the deal, Corporate Office Properties will assume $107 million worth of Constellation debt; issue BGE 7.9 million shares of common and preferred stock; and give BGE two seats on the company's board.

TC Constellation's 37 employees will be folded into Corporate Office Properties and remain in Columbia.

Pleased with deal

"I'm very happy with what happened," said Randall M. Griffin, Constellation's president, who will become Corporate Office Properties president and chief operating officer. "We took a portfolio that was 57 percent leased and turned it around, doubled the net operating income, added a tremendous property management arm and a lot of value overall."

"This is the perfect scenario," Griffin added. "You couldn't have written a better script."

Corporate Office Properties shares closed yesterday at $8.25, up 12.5 cents.

BGE gained 25 cents to close at $30.875.

Pub Date: 8/22/98

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