Chesapeake Fall Threatens Oklahoma Real Estate Fire Sale

Chesapeake Fall Threatens Oklahoma Real Estate Fire Sale
Chesapeake Energy Arena in Oklahoma City. Photographer: David Sherman/NBAE via Getty Images

Chesapeake Energy Corp., whose $805 million investment in Oklahoma City’s land and buildings has helped reduce commercial real estate vacancies, threatens to collapse the market as it faces a cash squeeze and seeks to sell assets.

The second-largest U.S. natural-gas producer has spent $448.7 million to build a 120-acre (50-hectare) headquarters campus in the northwestern part of the city and an additional $356.7 million to develop three nearby retail centers and buy office buildings and more land, according to Peter Brzycki, a former Oklahoma City real estate broker who tracks the company’s properties.

While a sell-off of its commercial property may please the company’s investors, who have seen share prices decline as Chesapeake struggles to fill a cash-flow shortfall, a quick divestiture would also depress Oklahoma City’s office market, local real estate professionals said.

“If something were to happen to Chesapeake, the whole northwestern market would collapse,” said Don Karchmer, a local developer and investor who’s been involved with some of the company’s real estate activities. “The whole community has a fear of what could happen. It would be a huge hurt.”

Chesapeake, the second-largest private employer in Oklahoma City, is seeking to sell as much as $14 billion in assets in 2012 to raise cash.

The company fell 2.6 percent to $18.59 at 11:25 a.m. in New York. The shares have declined 17 percent this year as gas prices fell and after reports that Chief Executive Officer Aubrey McClendon was getting personal loans from companies that were also financing Chesapeake.

No Sale

The Oklahoma City properties aren’t part of Chesapeake’s planned divestiture program, said Michael Kehs, a company spokesman.

“We use our real estate every day, so it’s not for sale,” he said. Kehs said Brzycki’s tally of spending on Chesapeake’s campus was low and the figure for other real-estate development was high. He declined to comment on the total investment number.

Investors, including billionaire Carl Icahn, have called for the company to get rid of assets that aren’t central to its energy production business.

“You’ve got a cash crunch, and you’re not a real estate developer,” said David Dreman, chairman of Dreman Value Management Inc. in Jersey City, New Jersey, which controls about 1 million Chesapeake shares. “If I had a cash crunch and I had really good wells and very promising property, I don’t think I’d be in the restaurant business.”

Leading Recovery

Chesapeake’s real estate holdings include shopping centers and land on which a restaurant co-owned by McClendon operates.

In recent years, Chesapeake has helped to cushion Oklahoma City from the nation’s recession and tepid recovery. The city’s 4.5 percent unemployment rate was the lowest of any metropolitan area with a population over 1 million, according to a May survey by the U.S. Bureau of Labor Statistics. Chesapeake had 5,000 local employees at the end of 2011, the city’s second-largest private employer after Integris Health.

The company has led a recovery of vacancy rates for top-tier office space in the city to “near pre-recession levels,” according to a report by broker Cushman & Wakefield Inc. The market’s 11.2 percent vacancy rate during the first three months of the year represents a 1.6 percentage point decline from a year earlier, it said. Less inventory has increased average Class A office rent to $21 a square foot.

Kerr-McGee Lessons

The $67 million Chesapeake spent to acquire three office buildings in the latter half of last year accounted for 75 percent of Oklahoma City’s total transactions in that real estate segment.

Now the company faces an estimated cash shortfall of $18.6 billion by the end of 2013, according to Alembic Global Advisors. Chesapeake has lost about $7 billion in market value in the past year amid falling energy prices and shareholder unrest about McClendon’s personal stakes -- and related debts -- in company wells. The board last month replaced McClendon as chairman and named four new directors.

Larkin Warner, a retired Oklahoma State University economics professor who lives near Chesapeake’s campus, recalls the departure of Kerr-McGee Corp., the Oklahoma energy company co-founded by McClendon’s great-uncle Robert Kerr that was bought by Houston-based Anadarko Petroleum Corp. in 2006.

“The day you begin to think the last few years are going to go on forever, that’s when you’re in trouble,” said Warner. For Kerr-McGee, “what happened was like the smile on the Cheshire Cat. It just gradually shrunk.”

Assessed Values

The company, which has leased 16 million acres of land nationally for drilling, has also been aggressive in its back yard, accumulating 3 million square feet of office space and paying top dollar for properties.

Chesapeake “routinely paid two to five times the current assessed value for virtually everything they acquired, and then added substantial construction costs on top of that,” said Brzycki, who has tracked 445 Chesapeake real estate purchases since 2005 using county and municipal records and who posts his findings on an forum.

Since 2005, the company has spent $152 million to acquire and upgrade office buildings away from its campus. Those 12 properties’ assessed value is now $106.2 million, according to municipal and county records. Chesapeake also put $152 million into development plans for three retail complexes, which now are 27 percent vacant and have an assessed value of $50.9 million.

Attracting Talent

While Oklahoma City commercial building valuations are based partly on comparable properties’ recent sales, according to the county assessor’s website, their assessed value doesn’t necessarily reflect market value.

Kehs said the main purpose of Chesapeake’s campus and adjacent retail development “is to create a work environment that is able to help us attract the best talent.” He declined to discuss the company’s real estate investment performance and said its office costs are lower than other large employers.

Chesapeake bought three tracts of land just south of its headquarters for $1.2 million in 2004. Within a year, it sold the parcels in two transactions for a total of $865,000, a 28 percent loss. The sale in part was in the form of a swap to add land to its campus.

Chesapeake spent $38.2 million in 2011 to buy an office building called Caliber Center, which had sold for $20.1 million four years earlier. The company’s $7 million purchase of an office building called Possum Creek in 2010 was two-and-a-half times what the property fetched five years earlier.

Nichols Hills

McClendon, who began his career as a land man buying up drilling rights, has been closely involved in Chesapeake’s real estate activities. He’s personally contacted owners of properties of interest to Chesapeake and sketched out plans to redevelop Nichols Hills Plaza on a paper napkin while lunching with then-tenant Robert Pemberton, owner of the Crescent Market.

That grocery store’s departure is one reason this effort hasn’t gone well with some residents and officials of Nichols Hills, an upscale suburb across the street from Chesapeake’s campus where McClendon and his wife and other prominent families reside.

After spending $66.5 million to purchase a variety of properties there, Chesapeake’s plans have been blocked by town officials concerned that a makeover of the retail center will cause shops to close for an extended period. The community of Nichols Hills counts on sales tax receipts from merchants for the majority of municipal revenue.

Whole Foods

The company also has met opposition from Nichols Hills Plaza patrons, some of whom staged a rally last October. The patrons were protesting the demise of two longstanding businesses, including Crescent Market. Pemberton, who said his family-owned business dates back to the Oklahoma land run in 1889, couldn’t compete with the new Whole Foods Market Inc. store in a Chesapeake-owned shopping center.

“Aubrey saw himself creating a new kind of market that Oklahoma City is ready for and there’s some logic to that, but it hasn’t worked out that way,” said Karchmer, the real estate developer who considers himself an admirer of McClendon.

For now, Chesapeake continues to expand its headquarters campus. Four construction tower cranes overlook eight new buildings and earthmoving equipment lays groundwork for more.

A 40-foot (12-meter) pile of dirt towers over the back yard of Charlie Maupin, a 63-year-old landscaper. Chesapeake has bought up scores of homes to expand its campus, and his could be next. The house, built with his hands, once looked out on trees. It now faces a clay-colored retention pond.

The landscaper said he’s gotten occasional calls from Chesapeake’s CEO asking if he’s ready to move.

Maupin expects to be compensated fairly by Chesapeake when he does move, and he thinks McClendon will turnaround the company. “He’s going to pull rabbits out of his hat for the next 10 years.”

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