WACC Project- Brookdale Senior Living, Inc. BKD

WACCProject- Brookdale Senior Living, Inc. BKD

Tableof Contents

Introduction 2

Background 2

Business Performance 2

Calculations 4

Cost of Equity 4

Determining Beta 4

Regression Summary 5

Weight of Equity 7

Weight of Debt 7

Cost of Equity 7

Market premium 8

Cost of Equity 8

Cost of Debt 8

WACC 8

Explanation 9

Assumptions 9

Appendix 10

Appendix A: Market and Stock Returns 10

Appendix B: Balance Sheet 11

References 13

BrookdaleSenior Living, BKD

Introduction

BrookdaleSenior Living was established in 1978 in Brentwood, Tennesee. Thecompany operates the senior`s residences owns the largest seniorliving communities in United States. There over 570 retirements andsenior living communities in their operation. The company employeesabout 35,000 staff and has more than 55,000 residents. Majorly, thecompany deals with independent living, rehabilitation, Alzheimer`s,and dementia care, skilled nursing and personalized assisted living.Among the main subsidiaries is the Innovative Senior Care (ISC) thatoffers education programming and fitness, rehabilitation and healthservices.

Background

BrookdaleSenior Living was started in 1970s with the main aim of focusing onthe large-scale urban retirement communities living in large citieslike Chicago, Miami, and New York. Such models are a major replica offive-star hotels like Marriott, Hilton, and Hyatt. The companyexperienced massive growths from 1900s to 2000s. During this period,the company developed various communities that reflected therevolution in Continuous Care Retirement Communities (CCRC). Thishouses all process brands like assisted living, memory carefacilities, independent living and skilled nursing. FortressInvestment was the major shareholder in Brookdale, with approximately51 percent shareholding.

Business Performance

Thecompany has showed immense growth, and by 2005, the company ownedover 100 standalone properties. The Fortress Investments acquired theAlterra Corporation, formerly known as Alternative Living Services.Alterra was a Milwaukee-WI based company that developed and openedover 500 memory care and assisted living properties in United Statesbetween 1993 and 2003. At some point, Alterra became the largestprovider of memory care and assisted living docket. The rapid growthfor the company seemed detrimental and costly for the companycompelling it to file the bankruptcy protection in Chapter 11 by theyear 2004. As a result, the company managed to sell a third of itsproperty, bringing down the total facilities to 300. It was duringthis bankruptcy period that Fortress purchased Alterra, which wasunder the management of Emeritus Senior Living.

Asthe management agreement term for Emeritus was almost expiring, theAlterra portfolio was performing very well, especially because of theaggressiveness of divisional and corporate leaders in proving thatAlterra was not completely dead. This compelled Fortress to bringabout a merger to bring together the Brookdale Portfolio and risingAlterra portfolio. The merger was approved in 2005, and this broughttogether the total property in Brookdale to 390. The merger tookadvantage of the promising financial environment and abundance ofcash reserves to purchase other small senior living organization inUnited States. These include Southern Assisted Living (Chapel Hill)in North Carolina in 2006 at $82.6M, Liberty Senior Services,Southland Properties and Wellington Senior Living. This madeBrookdale become the second senior care property provider in UnitedStates after Sunrise[ CITATION Wan10 l 1033 ].

ByJuly 2006, Brookdale-Nashville merger was announced. Nashville was anAmerican Retirement Corporation (ARC) based in Tennessee, and itoperated over 130 properties in US ranging from assisted living toCCRC campuses and independent living facilities. Nashville had beenin operation since 1970s. Fortress identified Nashville as anopportunity to propel it to become the leading senior living providerbecause of the size, and its success in marrying two of the mostsuccessful and the longest-running companies in senior living[ CITATION Hee11 l 1033 ].The merger saw Brookdale operating over 550 communities within 36states in United States. By September 2009, Brookdale agreed withSunrise to be given 21 free standing properties in United States.Brookdale entered into an agreement in October 2011 to acquire theHorizon Bay Retirement Living. This was a privately owned companycomprising of approximately 90 communities. The first quarter of 2014was characterized by Brookdale announcing the intentions of Mergingwith Emeritus Senior Living. The merger was completed in late 2014,and this saw Brookdale become the only national senior servicesprovider[CITATION Pie09 l 1033 ].

Calculations

Costof Equity(Common Stock) from the balance sheet, common stock is $1,870 BetaCalculations

DeterminingBetaBetafrom yahoo finance for BKD is 1.83

TheBKD stock prices were taken from 28thApril 2010 to 28thMarch 2015 on a monthly basis. This yielded 60 data points

Figure1: Regressionof Return on Stock against Return on Market

Inthis case:

α= 8×10-5

β=0.5888

Regression Summary

SUMMARY OUTPUT

Regression Statistics

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Multiple R

0.709826074

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

R Square

0.503853056

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Adjusted R Square

0.495298798

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Standard Error

1.650631576

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Observations

60

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

ANOVA

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

df

SS

MS

F

Significance F

&nbsp

&nbsp

&nbsp

Regression

1

160.4803516

160.480352

58.90085

2.15E-10

&nbsp

&nbsp

&nbsp

Residual

58

158.0259067

2.7245846

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Total

59

318.5062583

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.200515311

0.221709359

0.90440616

0.369521

-0.24328

0.644315

-0.24328

0.644315

X Variable 1

0.032231444

0.004199707

7.67468899

2.15E-10

0.023825

0.040638

0.023825

0.040638

Fromthe regression summary, R has three values 0.7098, 0.5039 and0.4953. Getting the average of two largest value, R2is 0.6068. It is not surprising that the BKD beta is less than 1. Fortypical real estate companies, the acceptable beta should be lessthan 1. However, when compared to the beta from yahoo finance, thisvalue is considerably lower than one.

WACC

Normally,the assets of a company are normally financed using equity and debt[ CITATION Bru11 l 1033 ]. Therefore, below are the calculations forthe weight of debt and weight of equity.

Therefore,

Weight of Equity

0.6082

Weight of Debt

0.3918

Cost of Equity

TheCapital Asset Pricing Model have been used in calculating requiredrate of return. Capital Assets Pricing Model (CAPM) describes therelationship between the risk and expected return and provides amodel for pricing the risky securities[ CITATION Lar05 l 1033 ]. CAPM describes the relationship between risk and expected return,and it serves as a model for the pricingof risky securities. According to the model expected rate of returnon portfolio or security, is equivalent to rate on risk-freeportfolio and the risk premium[ CITATION Sha12 l 1033 ].Failure for the expected return to meetthe required return implies the investment is not feasible.

Therisk-free rate was taken to be equivalent to 10-year TreasuryConstant Maturity Rate of 2.01 percent. From yahoo finance, Betavalue is 1.83.

Market premiumCost of EquityCost of Debt

Calculationof cost of debt used the Interest Expense for last year’s fiscalyear divided by the average debt for 2013 and 2012 in order to get asimplified cost of debt. As at 31st Dec 2014, Brookdalehad an Interest Expense of $248.188 Million. The book valuecalculated Book Value of Debt (D) above is $4451.267 Million.

WACC

Therefore,WACC represented by the formula

=12.21%

Explanation

Raisingcapital costs money. As a result, a firm generating higher return oninvestment than the costs means that the company can raise thenecessary capital for the investment to earn excess returns[ CITATION Fie11 l 1033 ].If Brookdale has to continue earning excess returns on any newinvestment. A firm that gets returns that fail to match up with thecost of capital tends to destroy its value as it expands. From theanalysis, the Weighted Average Cost of Capital (WACC) is 12.21%,and the return on investment capital is 0.64%. Thisimplies that the returns in Brookdale cannot be matched up with thecost of capital hence this will destroy its value as it expands.

Assumptions

Thecalculations were based on the following assumption

  1. Book value was used in calculations to represent and simplified through addition of the average values for both the long-term and short-term averages.

  2. WACC ignored the preferred stock

  3. The market premium value was taken at 7.5%

  4. The simplified cost of debt was gotten by dividing the average debt for the last two years

AppendixAppendix A: Marketand Stock Returns

Closing Date B

Closing Price

Stock Return

Market Return

%stock Return

%stock Return

3/2/2015

2061.02

37.65

0

0

0

0

2/2/2015

2104.5

37.51

-0.14

43.48

-0.004%

0.021%

1/2/2015

1994.99

33.75

-3.76

-109.51

-0.100%

-0.052%

12/1/2014

2058.9

36.67

2.92

63.91

0.087%

0.032%

11/3/2014

2067.56

35.42

-1.25

8.66

-0.034%

0.004%

10/1/2014

2018.05

33.71

-1.71

-49.51

-0.048%

-0.024%

9/2/2014

1972.29

32.22

-1.49

-45.76

-0.044%

-0.023%

8/1/2014

2003.37

34.95

2.73

31.08

0.085%

0.016%

7/1/2014

1930.67

34.65

-0.3

-72.7

-0.009%

-0.036%

6/2/2014

1960.23

33.34

-1.31

29.56

-0.038%

0.015%

5/1/2014

1923.57

33.26

-0.08

-36.66

-0.002%

-0.019%

4/1/2014

1883.95

31.84

-1.42

-39.62

-0.043%

-0.021%

3/3/2014

1872.34

33.51

1.67

-11.61

0.052%

-0.006%

2/3/2014

1859.45

33.54

0.03

-12.89

0.001%

-0.007%

1/2/2014

1782.59

27.46

-6.08

-76.86

-0.181%

-0.041%

12/2/2013

1848.36

27.18

-0.28

65.77

-0.010%

0.037%

11/1/2013

1805.81

29.16

1.98

-42.55

0.073%

-0.023%

10/1/2013

1756.54

27.08

-2.08

-49.27

-0.071%

-0.027%

9/3/2013

1681.55

26.3

-0.78

-74.99

-0.029%

-0.043%

8/1/2013

1632.97

25.02

-1.28

-48.58

-0.049%

-0.029%

7/1/2013

1685.73

29.12

4.1

52.76

0.164%

0.032%

6/3/2013

1606.28

26.44

-2.68

-79.45

-0.092%

-0.047%

5/1/2013

1630.74

28.35

1.91

24.46

0.072%

0.015%

4/1/2013

1597.57

25.79

-2.56

-33.17

-0.090%

-0.020%

3/1/2013

1569.19

27.88

2.09

-28.38

0.081%

-0.018%

2/1/2013

1514.68

27.68

-0.2

-54.51

-0.007%

-0.035%

1/2/2013

1498.11

27.01

-0.67

-16.57

-0.024%

-0.011%

12/3/2012

1426.19

25.32

-1.69

-71.92

-0.063%

-0.048%

11/1/2012

1416.18

25.56

0.24

-10.01

0.009%

-0.007%

10/1/2012

1412.16

23.46

-2.1

-4.02

-0.082%

-0.003%

9/4/2012

1440.67

23.22

-0.24

28.51

-0.010%

0.020%

8/1/2012

1406.58

21.73

-1.49

-34.09

-0.064%

-0.024%

7/2/2012

1379.32

16.46

-5.27

-27.26

-0.243%

-0.019%

6/1/2012

1362.16

17.74

1.28

-17.16

0.078%

-0.012%

5/1/2012

1310.33

16.49

-1.25

-51.83

-0.070%

-0.038%

4/2/2012

1397.91

19.01

2.52

87.58

0.153%

0.067%

3/1/2012

1408.47

18.72

-0.29

10.56

-0.015%

0.008%

2/1/2012

1365.68

18.64

-0.08

-42.79

-0.004%

-0.030%

1/3/2012

1312.41

17.6

-1.04

-53.27

-0.056%

-0.039%

12/1/2011

1257.6

17.39

-0.21

-54.81

-0.012%

-0.042%

11/1/2011

1246.96

15.55

-1.84

-10.64

-0.106%

-0.008%

10/3/2011

1253.3

16.58

1.03

6.34

0.066%

0.005%

9/1/2011

1131.42

12.54

-4.04

-121.88

-0.244%

-0.097%

8/1/2011

1218.89

16.11

3.57

87.47

0.285%

0.077%

7/1/2011

1292.28

21.39

5.28

73.39

0.328%

0.060%

6/1/2011

1320.64

24.25

2.86

28.36

0.134%

0.022%

5/2/2011

1345.2

25.81

1.56

24.56

0.064%

0.019%

4/1/2011

1363.61

27.24

1.43

18.41

0.055%

0.014%

3/1/2011

1325.83

28

0.76

-37.78

0.028%

-0.028%

2/1/2011

1327.22

26.89

-1.11

1.39

-0.040%

0.001%

1/3/2011

1286.12

21.85

-5.04

-41.1

-0.187%

-0.031%

12/1/2010

1257.64

21.41

-0.44

-28.48

-0.020%

-0.022%

11/1/2010

1180.55

19.12

-2.29

-77.09

-0.107%

-0.061%

10/1/2010

1183.26

18.78

-0.34

2.71

-0.018%

0.002%

9/1/2010

1141.2

16.31

-2.47

-42.06

-0.132%

-0.036%

8/2/2010

1049.33

13.4

-2.91

-91.87

-0.178%

-0.081%

7/1/2010

1101.6

14.18

0.78

52.27

0.058%

0.050%

6/1/2010

1030.71

15

0.82

-70.89

0.058%

-0.064%

5/3/2010

1089.41

17.59

2.59

58.7

0.173%

0.057%

4/28/2010

1186.69

21.5

3.91

97.28

0.222%

0.089%

Appendix B: BalanceSheet

Balance Sheet

Period Ending

31-Dec-14

31-Dec-13

31-Dec-12

&nbsp

Assets

Current Assets

&nbsp

Cash And Cash Equivalents

142,945&nbsp&nbsp

96,702&nbsp&nbsp

112,336&nbsp&nbsp

&nbsp

Short Term Investments

– &nbsp

– &nbsp

– &nbsp

&nbsp

Net Receivables

233,929&nbsp&nbsp

121,905&nbsp&nbsp

113,778&nbsp&nbsp

&nbsp

Inventory

– &nbsp

– &nbsp

– &nbsp

&nbsp

Other Current Assets

237,915&nbsp&nbsp

76,255&nbsp&nbsp

82,924&nbsp&nbsp

&nbsp

Total Current Assets

614,789&nbsp&nbsp

294,862&nbsp&nbsp

309,038&nbsp&nbsp

Long Term Investments

312,925&nbsp&nbsp

44,103&nbsp&nbsp

31,386&nbsp&nbsp

Property Plant and Equipment

8,389,505&nbsp&nbsp

3,895,475&nbsp&nbsp

3,879,977&nbsp&nbsp

Goodwill

736,805&nbsp&nbsp

109,553&nbsp&nbsp

109,553&nbsp&nbsp

Intangible Assets

154,773&nbsp&nbsp

158,757&nbsp&nbsp

159,942&nbsp&nbsp

Accumulated Amortization

– &nbsp

– &nbsp

– &nbsp

Other Assets

312,566&nbsp&nbsp

235,007&nbsp&nbsp

216,872&nbsp&nbsp

Deferred Long Term Asset Charges

– &nbsp

– &nbsp

– &nbsp

&nbsp

Total Assets

10,521,363&nbsp&nbsp

4,737,757&nbsp&nbsp

4,706,768&nbsp&nbsp

Liabilities

Current Liabilities

Accounts Payable

498,968&nbsp&nbsp

275,319&nbsp&nbsp

244,079&nbsp&nbsp

Short/Current Long Term Debt

272,265&nbsp&nbsp

201,954&nbsp&nbsp

509,543&nbsp&nbsp

Other Current Liabilities

106,529&nbsp&nbsp

393,571&nbsp&nbsp

377,276&nbsp&nbsp

&nbsp

Total Current Liabilities

877,762&nbsp&nbsp

870,844&nbsp&nbsp

1,130,898&nbsp&nbsp

Long Term Debt

5,993,691&nbsp&nbsp

2,434,624&nbsp&nbsp

2,169,826&nbsp&nbsp

Other Liabilities

267,849&nbsp&nbsp

88,321&nbsp&nbsp

83,073&nbsp&nbsp

Deferred Long-Term Liability Charges

499,820&nbsp&nbsp

323,031&nbsp&nbsp

325,985&nbsp&nbsp

Minority Interest

517&nbsp&nbsp

– &nbsp

– &nbsp

Negative Goodwill

– &nbsp

– &nbsp

– &nbsp

&nbsp

Total Liabilities

7,639,639&nbsp&nbsp

3,716,820&nbsp&nbsp

3,709,782&nbsp&nbsp

Stockholders` Equity

Misc Stocks Options Warrants

– &nbsp

– &nbsp

– &nbsp

Redeemable Preferred Stock

– &nbsp

– &nbsp

– &nbsp

Preferred Stock

– &nbsp

– &nbsp

– &nbsp

Common Stock

1,870&nbsp&nbsp

1,277&nbsp&nbsp

1,267&nbsp&nbsp

Retained Earnings

-1,108,001

-959,011

-955,427

Treasury Stock

-46,800

-46,800

-46,800

Capital Surplus

4,034,655&nbsp&nbsp

2,025,471&nbsp&nbsp

1,997,946&nbsp&nbsp

Other Stockholder Equity

– &nbsp

– &nbsp

– &nbsp

&nbsp

Total Stockholder Equity

2,881,724&nbsp&nbsp

1,020,937&nbsp&nbsp

996,986&nbsp&nbsp

References

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Fields, E. (2011). The Essentials of Finance and Accounting for Nonfinancial Managers. New York: American Management Association.

Heerkens, G. (2011). Out of WACC. Newtown Square, PA: Project Management Institute.

http://topics.nytimes.com/topics/news/business/companies/brookdale-senior-living-inc/index.html

http://www.bizjournals.com/triangle/stories/2006/04/03/daily36.html

http://finance.yahoo.com/q?s=BKD

Larson, S. J. (2005). Real Estate Investment Trusts and Stock Price Reversals. The Journal of Real Estate Finance and Economics 30(1), 81-88.

Pierru, A. (2009). The Weighted Average Cost of Capital Is Not Quite Right. The Quarterly Review of Economics and Finance 49(3), 1219-223.

Sharma, M. (2012). Determining Volatility, Cost of Equity, and Equity Valuation of Private Business for M&ampA. The Journal of Private Equity 15(3), 102-105.

Wang, S. (2010). An Application of Fuzzy Set Theory to the Weighted Average Cost of Capital and Capital Structure Decision. Technology and Investment 01(04): 248-56.