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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 2, 2013
Commission file number 333-168515
 
Toys “R” Us Property Company II, LLC
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
37-1512919
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
One Geoffrey Way
Wayne, New Jersey
 
07470
(Address of principal executive offices)
 
(Zip code)
(973) 617-3500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  ¨
(Note: As a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if the registrant were subject to such filing requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of December 17, 2013, all of our outstanding membership interests were privately held by our sole member, Giraffe Junior Holdings, LLC.
 



TOYS “R” US PROPERTY COMPANY II, LLC
TABLE OF CONTENTS
 
 
PAGE  
 
 
 



PART 1 – FINANCIAL INFORMATION

Item 1.
Financial Statements

TOYS “R” US PROPERTY COMPANY II, LLC
CONDENSED BALANCE SHEETS
(Unaudited)

(In thousands)
 
November 2,
2013
 
February 2,
2013
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
68,804

 
$
27,658

Due from affiliate, net
 
4,680

 
5,097

Prepaid expenses
 
1,800

 
1,338

Total current assets
 
75,284

 
34,093

Real Estate, Net:
 
 
 
 
Land
 
168,273

 
169,937

Buildings, net
 
153,261

 
159,815

Property and leasehold improvements, net
 
34,192

 
38,974

Total real estate, net
 
355,726

 
368,726

Straight-line rent receivable from affiliate
 
79,367

 
69,974

Debt issuance costs
 
14,662

 
17,372

Total Assets
 
$
525,039

 
$
490,165

 
 
 
 
 
LIABILITIES AND MEMBER’S DEFICIT
 
 
 
 
Current Liabilities:
 
 
 
 
Accrued interest
 
$
26,098

 
$
10,835

Real estate taxes payable
 
6,026

 
5,271

Deferred related party revenue
 
6,913

 
7,003

Deferred third party rent liabilities
 
4

 
534

Other current liabilities
 
389

 
425

Total current liabilities
 
39,430

 
24,068

Long-term debt
 
718,894

 
717,989

Deferred third party rent liabilities
 
13,169

 
12,821

Member’s deficit
 
(246,454
)
 
(264,713
)
Total Liabilities and Member’s Deficit
 
$
525,039

 
$
490,165

See accompanying notes to the Condensed Financial Statements.

1


TOYS “R” US PROPERTY COMPANY II, LLC
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
 
13 Weeks Ended
 
39 Weeks Ended
(In thousands)
 
November 2,
2013
 
October 27,
2012
 
November 2,
2013
 
October 27,
2012
Rental revenues:
 
 
 
 
 
 
 
 
Base rents
 
$
25,880

 
$
25,887

 
$
78,272

 
$
78,098

Tenant reimbursements
 
3,156

 
3,054

 
9,496

 
9,306

Total revenues
 
29,036

 
28,941

 
87,768

 
87,404

Depreciation
 
2,791

 
2,777

 
8,549

 
8,478

Rental expense
 
678

 
678

 
2,017

 
2,034

Common area maintenance expenses
 
3,156

 
3,054

 
9,496

 
9,306

Other operating expenses
 
417

 
515

 
1,268

 
1,362

Total operating expenses
 
7,042

 
7,024

 
21,330

 
21,180

Operating earnings
 
21,994

 
21,917

 
66,438

 
66,224

Interest expense, net
 
16,523

 
16,507

 
49,664

 
49,504

Earnings from continuing operations
 
5,471

 
5,410

 
16,774

 
16,720

(Loss) earnings from discontinued operations
 

 
(89
)
 
11,887

 
133

Net earnings
 
$
5,471

 
$
5,321

 
$
28,661

 
$
16,853

See accompanying notes to the Condensed Financial Statements.

2


TOYS “R” US PROPERTY COMPANY II, LLC
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
39 Weeks Ended
(In thousands)
 
November 2,
2013
 
October 27,
2012
Cash Flows from Operating Activities:
 
 
 
 
Net earnings
 
$
28,661

 
$
16,853

Adjustments to reconcile Net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation
 
9,614

 
9,531

Amortization of debt issuance costs
 
2,710

 
2,710

Amortization of original issue discount
 
905

 
828

Gain on sale of real estate
 
(547
)
 

Changes in operating assets and liabilities:
 
 
 
 
Due from affiliate, net
 
417

 
(115
)
Prepaid expenses
 
(462
)
 
(644
)
Straight-line rent receivable from affiliate and Deferred third party rent liabilities
 
(9,575
)
 
(9,345
)
Accrued interest, Real estate taxes payable and Other current liabilities
 
15,982

 
15,816

Deferred related party revenue
 
(90
)
 
243

Net cash provided by operating activities
 
47,615

 
35,877

Cash Flows from Investing Activities:
 
 
 
 
Proceeds from sale of real estate
 
3,933

 

Net cash provided by investing activities
 
3,933

 

Cash Flows from Financing Activities:
 
 
 
 
Distributions
 
(10,402
)
 
(13,524
)
Net cash used in financing activities
 
(10,402
)
 
(13,524
)
Cash and cash equivalents:
 
 
 
 
Net increase during period
 
41,146

 
22,353

Cash and cash equivalents at beginning of period
 
27,658

 
9,609

Cash and cash equivalents at end of period
 
$
68,804

 
$
31,962

See accompanying notes to the Condensed Financial Statements.

3


TOYS “R” US PROPERTY COMPANY II, LLC
CONDENSED STATEMENTS OF CHANGES IN MEMBER’S DEFICIT
(Unaudited)
 
(In thousands)
 
Member’s Deficit
Balance, January 28, 2012
 
$
(270,402
)
Net earnings
 
16,853

Distributions
 
(13,524
)
Balance, October 27, 2012
 
$
(267,073
)
 
 
 
Balance, February 2, 2013
 
$
(264,713
)
Net earnings
 
28,661

Distributions
 
(10,402
)
Balance, November 2, 2013
 
$
(246,454
)
See accompanying notes to the Condensed Financial Statements.

4


TOYS “R” US PROPERTY COMPANY II, LLC
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of presentation
As used herein, the “Company,” “we,” “us,” or “our” means Toys “R” Us Property Company II, LLC (“TRU Propco II”), except as expressly indicated or unless the context otherwise requires. TRU Propco II was formed in July 2005 as part of a legal reorganization of the businesses of Toys “R” Us, Inc. (“TRU”). TRU, through various subsidiaries, operates or licenses Toys “R” Us and Babies “R” Us stores in the United States and foreign countries and jurisdictions. We are ultimately owned by TRU through our indirect parent, Toys “R” Us Delaware, Inc. (“Toys-Delaware”), to whom we lease or sublease substantially all of our properties and from whom we derive substantially all of our revenues and cash flows. The Company is one reportable segment.
As a result of the reorganization, we received, as contributions from Toys-Delaware and other affiliates, certain properties which we now lease to Toys-Delaware. As the reorganization was between entities under common control, the net assets transferred were recorded at their carrying value.
The Condensed Balance Sheets as of November 2, 2013 and February 2, 2013, the Condensed Statements of Operations for the thirteen and thirty-nine weeks ended November 2, 2013 and October 27, 2012, the Condensed Statements of Cash Flows and the Condensed Statements of Changes in Member’s Deficit for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, have been prepared by us in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim reporting, and in accordance with the requirements of this Quarterly Report on Form 10-Q. Our interim Condensed Financial Statements are unaudited and are subject to year-end adjustments. In the opinion of management, the financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations for the thirteen and thirty-nine weeks then ended. The Condensed Balance Sheet at February 2, 2013, presented herein, has been derived from our audited balance sheet included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013, but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the financial statements and footnotes thereto included within our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

2. Real estate, net
(In thousands)
 
November 2,
2013
 
February 2,
2013
Land
 
$
168,273

 
$
169,937

Buildings
 
267,383

 
273,285

Property and leasehold improvements
 
128,420

 
132,173

 
 
564,076

 
575,395

Less: accumulated depreciation
 
(208,350
)
 
(206,669
)
Total
 
$
355,726

 
$
368,726


3. Discontinued operations
During the thirteen weeks ended November 2, 2013, we sold no properties and had no leases expire with unrelated third party landlords. During the thirty-nine weeks ended November 2, 2013, we sold two owned properties and a non-operating parcel to unrelated third parties for proceeds of $4 million, resulting in a net gain of $1 million. Additionally, we had an early termination of a ground lease and had a ground lease expire with an unrelated third party landlord for which we opted not to exercise the renewal option. The Amended and Restated Master Lease Agreement (the “TRU Propco II Master Lease”) requires Toys-Delaware to make a payment to us upon early termination of a lease, as set forth under the terms of the TRU Propco II Master Lease, or the successful execution of the sale of a property by us to a third party if the proceeds from the sale are less than the net present value of the base rent for the property over its remaining term, discounted at 10% per annum. We did not record any termination payments for the thirteen weeks ended November 2, 2013. We recorded termination payments of $12 million for the thirty-nine weeks ended November 2, 2013, in Earnings from discontinued operations on the Condensed Statements of Operations. We did not record any termination payments for the thirteen and thirty-nine weeks ended October 27, 2012.
During the thirteen and thirty-nine weeks ended October 27, 2012, we sold no properties and had no leases expire with unrelated third party landlords.

5


We reported the operating results for these properties as (Loss) earnings from discontinued operations on the Condensed Statements of Operations for the thirteen and thirty-nine weeks ended November 2, 2013 and October 27, 2012. The operating results for these properties classified as discontinued operations were derived from our historical financial information and have been segregated from continuing operations and reported separately on the Condensed Statements of Operations for the thirteen and thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively. These amounts have been summarized below:
 
 
13 Weeks Ended
(In thousands)
 
November 2,
2013
 
October 27,
2012
Total revenues (1)
 
$
(4
)
 
$
357

Loss from discontinued operations
 
$

 
$
(89
)
 
 
39 Weeks Ended
(In thousands)
 
November 2,
2013
 
October 27,
2012
Total revenues (1)
 
$
11,964

 
$
1,280

Earnings from discontinued operations
 
$
11,887

 
$
133

(1) Includes termination payments from Toys-Delaware.

4. Long-term debt
As of November 2, 2013 and February 2, 2013, the carrying value of our debt was $719 million and $718 million, respectively, with a fair value of $751 million and $767 million, respectively. The fair value of our long-term debt was estimated using Level 1 inputs, which represent quoted market prices of our debt instrument.

5. Fair value measurements
To determine the fair value of our assets and liabilities, we utilize the established fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Cash Equivalents
Cash equivalents include highly liquid investments with an original maturity of three months or less at acquisition. Due to the nature and short maturity of these investments, their carrying amount approximates fair value. Therefore, we have determined that our cash equivalents in their entirety are classified as Level 1 within the fair value hierarchy. We had cash equivalents of $68 million and $20 million at November 2, 2013 and February 2, 2013, respectively.

6. Member’s deficit
Giraffe Junior Holdings, LLC, an indirect wholly-owned subsidiary of TRU, is the direct owner of 100% of our limited liability company interests. We evaluate our cash balances on an ongoing basis and periodically distribute cash to our parent companies. During the thirty-nine weeks ended November 2, 2013 and October 27, 2012, we made cash distributions of $10 million and $14 million, respectively, in dividends.

7. Related party transactions
Rental Revenues
Our Rental revenues are derived from payments received under the TRU Propco II Master Lease we entered into with Toys-Delaware. The master lease agreement provides for Toys-Delaware to reimburse us for property related costs including, among others, real estate taxes and common area maintenance charges. Some of these costs are directly paid by Toys-Delaware and are recorded as both an expense and a tenant reimbursement. During each of the thirteen weeks ended November 2, 2013 and October 27, 2012, we earned related party Base rent revenues of $26 million. During the thirty-nine weeks ended November 2, 2013 and October 27, 2012, we earned related party Base rent revenues of $78 million and $79 million, respectively. In addition, we recorded Tenant reimbursements of $3 million under our leasing arrangements with Toys-Delaware during each of

6


the thirteen weeks ended November 2, 2013 and October 27, 2012. During each of the thirty-nine weeks ended November 2, 2013 and October 27, 2012, we recorded Tenant reimbursements of $10 million.
Termination Payments
As discussed in Note 3 entitled “Discontinued operations”, the TRU Propco II Master Lease requires Toys-Delaware to make a payment to us upon early termination of a lease, as set forth under the terms of the TRU Propco II Master Lease, or the successful execution of the sale of a property by us to a third party if the proceeds from the sale are less than the net present value of the base rent for the property over its remaining term, discounted at 10% per annum. We did not record any termination payments for the thirteen weeks ended November 2, 2013. We recorded termination payments of $12 million for the thirty-nine weeks ended November 2, 2013, in Earnings from discontinued operations on the Condensed Statements of Operations. We did not record any termination payments for the thirteen and thirty-nine weeks ended October 27, 2012.
Management Service Fees
Toys-Delaware provides a majority of the centralized corporate functions, including accounting, human resources, legal, tax and treasury services to TRU, other affiliates and us under a Domestic Services Agreement (“Agreement”). The costs are based on a formula for each affiliate, as defined in the Agreement, and are recorded in Other operating expenses on the Condensed Statements of Operations. During each of the thirteen weeks ended November 2, 2013 and October 27, 2012, the amounts charged to us for these services were less than $1 million. During each of the thirty-nine weeks ended November 2, 2013 and October 27, 2012, the amounts charged to us for these services were $1 million.
Due from affiliate, net
As of November 2, 2013 and February 2, 2013, Due from affiliate, net of $5 million, respectively, primarily represents real estate taxes, base rents and certain property reimbursements owed to us by Toys-Delaware.

8. Recent accounting pronouncements
In April 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting” (“ASU 2013-07”). ASU 2013-07 clarifies when an entity should apply the liquidation basis of accounting and provides principles for the measurement of associated assets and liabilities, as well as required disclosures. The amendments in this standard are effective prospectively for entities that determine liquidation is imminent for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of ASU 2013-07 is not expected to have a material impact on our Condensed Financial Statements.
In February 2013, the FASB issued ASU No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations. The amendments in this ASU are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application is required. The adoption of ASU 2013-04 is not expected to have a material impact on our Condensed Financial Statements.


7


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used herein the “Company,” “we,” “us,” or “our” means Toys “R” Us Property Company II, LLC (“TRU Propco II”), except as expressly indicated or unless the content otherwise requires. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help facilitate an understanding of our financial condition and our historical results of operations for the periods presented. This MD&A should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 and Condensed Financial Statements and the accompanying notes thereto, and contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” below.

Our Business
We are a special purpose entity owned indirectly by Toys “R” Us, Inc. (“TRU”), through Toys “R” Us – Delaware, Inc. (“Toys-Delaware”) and formed in July 2005. We own fee and ground leasehold interests in 125 properties in various retail markets throughout the United States. Under an operating company/property company structure, we lease these properties on a triple-net basis, to Toys-Delaware, the operating entity for all of TRU’s North American businesses, which operates the properties as Toys “R” Us stores, Babies “R” Us stores or side-by-side stores, or subleases them to alternative retailers. Substantially all of our revenues and cash flows are derived from payments from Toys-Delaware under the Amended and Restated Master Lease Agreement (the “TRU Propco II Master Lease”). For quarterly financial statements and other information about our master tenant, Toys-Delaware, see Exhibit 99.1 to this report.

Results of Operations
Earnings from Continuing Operations
 
 
13 Weeks Ended
 
39 Weeks Ended
($ In thousands)
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
Earnings from continuing operations
 
$
5,471

 
$
5,410

 
$
61

 
1.1
%
 
$
16,774

 
$
16,720

 
$
54

 
0.3
%
Earnings from continuing operations increased by a nominal amount for the thirteen and thirty-nine weeks ended November 2, 2013, compared to the same periods last year.

Total Revenues
 
 
13 Weeks Ended
 
39 Weeks Ended
($ In thousands)
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
Total revenues
 
$
29,036

 
$
28,941

 
$
95

 
0.3
%
 
$
87,768

 
$
87,404

 
$
364

 
0.4
%
Total revenues increased by a nominal amount for the thirteen and thirty-nine weeks ended November 2, 2013, compared to the same periods last year.

Depreciation
 
 
13 Weeks Ended
 
39 Weeks Ended
($ In thousands)
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
Depreciation
 
$
2,791

 
$
2,777

 
$
14

 
0.5
%
 
$
8,549

 
$
8,478

 
$
71

 
0.8
%
Depreciation increased by a nominal amount for the thirteen and thirty-nine weeks ended November 2, 2013, compared to the same periods last year.

Rental Expense
 
 
13 Weeks Ended
 
39 Weeks Ended
($ In thousands)
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
Rental expense
 
$
678

 
$
678

 
$

 
%
 
$
2,017

 
$
2,034

 
$
(17
)
 
(0.8
)%
Rental expense remained relatively consistent for the thirteen and thirty-nine ended November 2, 2013, compared to the same periods last year.


8


Common Area Maintenance Expenses
 
 
13 Weeks Ended
 
39 Weeks Ended
($ In thousands)
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
Common area maintenance expenses
 
$
3,156

 
$
3,054

 
$
102

 
3.3
%
 
$
9,496

 
$
9,306

 
$
190

 
2.0
%
Common area maintenance expenses increased by a nominal amount for the thirteen and thirty-nine weeks ended November 2, 2013, compared to the same periods last year. These expenses are fully reimbursed by our tenant under the TRU Propco II Master Lease, and are reflected in Tenant reimbursements, which is a component of Total revenues.

Other Operating Expenses
 
 
13 Weeks Ended
 
39 Weeks Ended
($ In thousands)
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
Other operating expenses
 
$
417

 
$
515

 
$
(98
)
 
(19.0
)%
 
$
1,268

 
$
1,362

 
$
(94
)
 
(6.9
)%
Other operating expenses decreased by $0.1 million to $0.4 million for the thirteen weeks ended November 2, 2013, compared to $0.5 million for the same period last year. The decrease was primarily due to a decline in state franchise taxes.
Other operating expenses decreased by a nominal amount for the thirty-nine weeks ended November 2, 2013, compared to the same period last year.

Interest Expense, Net
 
 
13 Weeks Ended
 
39 Weeks Ended
($ In thousands)
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
Interest expense, net
 
$
16,523

 
$
16,507

 
$
16

 
0.1
%
 
$
49,664

 
$
49,504

 
$
160

 
0.3
%
Interest expense, net increased by a nominal amount for the thirteen and thirty-nine weeks ended November 2, 2013, compared to the same periods last year.

(Loss) earnings from Discontinued Operations
 
 
13 Weeks Ended
 
39 Weeks Ended
($ In thousands)
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
 
November 2,
2013
 
October 27,
2012
 
$ Change
 
% Change
(Loss) earnings from discontinued operations
 
$

 
$
(89
)
 
$
89

 
(100.0
)%
 
$
11,887

 
$
133

 
$
11,754

 
8,837.6
%
Loss from discontinued operations decreased by a nominal amount for the thirteen weeks ended November 2, 2013, compared to the thirteen weeks ended October 27, 2012.
Earnings from discontinued operations increased to $11.9 million for the thirty-nine weeks ended November 2, 2013, compared to $0.1 million for the thirty-nine weeks ended October 27, 2012. The increase was primarily due to termination payments of $11.8 million recognized from Toys-Delaware as required under the TRU Propco II Master Lease for two lease terminations and two properties sold.

Liquidity and Capital Resources
Overview
As of November 2, 2013, we were in compliance with all of the covenants related to the 8.500% senior secured notes due fiscal 2017 (the “Secured Notes”).
Our largest source of operating cash flows is cash collections from our lessee, Toys-Delaware. In general, we utilize our cash to service debt, pay normal operating costs and at the discretion of our sole member, based on the recommendation of our management, and as permitted by the indenture governing the Secured Notes, declare and pay dividends or make distributions.

9


Additionally, the indenture governing the Secured Notes allows us to re-invest the net cash proceeds from the sale of properties (“Asset Sales” as defined in the indenture) within 720 days subsequent to the receipt of the proceeds. If net cash proceeds are not reinvested within 720 days of receipt, the net cash proceeds are deemed to be excess proceeds (“Excess Proceeds”). When the aggregate amount of Excess Proceeds exceeds $10.0 million, we are required to make an offer to all holders of the Secured Notes within 30 days to purchase Secured Notes with the Excess Proceeds. We have not recognized cumulative Asset Sales, as defined in the indenture, in excess of $10.0 million as of November 2, 2013.
We have been able to meet our operating cash needs principally by using cash on hand and cash flows from operations and we believe that cash generated from operations along with existing cash will be sufficient to fund expected cash flow requirements for the next twelve months.
Cash Flows
 
 
39 Weeks Ended
(In thousands)
 
November 2,
2013
 
October 27,
2012
 
Change
Net cash provided by operating activities
 
$
47,615

 
$
35,877

 
$
11,738

Net cash provided by investing activities
 
3,933

 

 
3,933

Net cash used in financing activities
 
(10,402
)
 
(13,524
)
 
3,122

Net increase during period in cash and cash equivalents
 
$
41,146

 
$
22,353

 
$
18,793

Cash Flows Provided by Operating Activities
During the thirty-nine weeks ended November 2, 2013, net cash provided by operating activities was $47.6 million, compared to $35.9 million for the thirty-nine weeks ended October 27, 2012. The increase in cash provided by operating activities was primarily due to termination payments received from Toys-Delaware as required under the TRU Propco II Master Lease of $11.8 million.
Cash Flows Provided by Investing Activities
During the thirty-nine weeks ended November 2, 2013, net cash provided by investing activities was $3.9 million due to proceeds received from the sale of real estate.
Cash Flows Used in Financing Activities
During the thirty-nine weeks ended November 2, 2013, net cash used in financing activities was $10.4 million, compared to $13.5 million for the thirty-nine weeks ended October 27, 2012. The decrease in cash used in financing activities was primarily due to a decline in Distributions.

Debt
Refer to the Annual Report on Form 10-K and Note 4 to the Condensed Financial Statements entitled “Long-term debt” for further details regarding our debt.

Contractual Obligations and Commitments
Our contractual obligations consist mainly of payments related to Long-term debt and related interest and operating leases related to real estate used in the operation of our business. Refer to the “Contractual Obligations and Commitments” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013, for details on our contractual obligations and commitments.

Critical Accounting Policies
Our Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities as of the date of the financial statements and during the applicable periods. We base these estimates on historical experience and on other factors that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions and could have a material impact on our Condensed Financial Statements. Refer to the Annual Report on Form 10-K for the fiscal year ended February 2, 2013, for a discussion of critical accounting policies.


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Recently Adopted Accounting Pronouncements
None.

Forward-Looking Statements
This Quarterly Report on Form 10-Q, the other reports and documents that we have filed or may in the future file with the Securities and Exchange Commission and other publicly released materials and statements, both oral and written, that we have made or may make in the future, may contain “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and such disclosures are intended to be covered by the safe harbors created thereby. These forward looking statements reflect our current views with respect to, among other things, our operations and financial performance. All statements herein or therein that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. We generally identify these statements by words or phrases, such as “anticipate,” “estimate,” “plan,” “project,” “expect,” “believe,” “intend,” “foresee,” “forecast,” “will,” “may,” “outlook,” and similar words or phrases. These statements discuss, among other things, our strategy, future financial or operational performance, anticipated cost savings, results of restructurings, cash flows generated from operating activities, anticipated developments, future financings, targets and future occurrences and trends.
These statements are subject to risks, uncertainties, and other factors, including, among others, the seasonality of Toys-Delaware’s business, competition in the retail industry, changes in Toys-Delaware's product distribution mix and distribution channels, general economic factors in the United States and other countries in which Toys-Delaware conducts its business, consumer spending patterns, Toys-Delaware's ability to implement its strategy, the availability of adequate financing to us, Toys-Delaware and TRU, access to trade credit, changes in consumer preferences, Toys-Delaware's dependence on key vendors for its merchandise, political and other developments associated with Toys-Delaware's international operations, costs of goods that Toys-Delaware sells, labor costs, transportation costs, domestic and international events affecting the delivery of toys and other products to Toys-Delaware's stores, product safety issues including product recalls, the existence of adverse litigation, changes in laws that impact Toys-Delaware's business, Toys-Delaware's and TRU's respective substantial level of indebtedness and related debt-service obligations, restrictions imposed by covenants in their and our respective debt agreements and other risks, uncertainties and factors set forth under Item 1A entitled “RISK FACTORS” of our Annual Report on Form 10-K filed on May 3, 2013 and in our reports and documents filed with the Securities and Exchange Commission. In addition, Toys-Delaware typically earns a disproportionate part of its annual operating earnings in the fourth quarter as a result of seasonal buying patterns and these buying patterns are difficult to forecast with certainty. These factors should not be construed as exhaustive, and should be read in conjunction with the other cautionary statements that are included in this report. We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update these statements in light of subsequent events or developments, unless required by the Securities and Exchange Commission's rules and regulations. Actual results and outcomes may differ materially from anticipated results or outcomes discussed in any forward-looking statement.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk
There has been no change in our exposure to market risk during the thirty-nine weeks ended November 2, 2013. For a discussion of our exposure to market risk, refer to Item 7A entitled “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

Item 4.
Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the principal executive and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

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We have evaluated, under the supervision and with the participation of our management, including our principal executive and principal financial officer, the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report.
Based on that evaluation, our principal executive and principal financial officer has concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter of fiscal 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
Although we do not currently have material legal proceedings pending against us, in the future, we may be involved in various lawsuits, claims and proceedings incident to the ordinary course of business. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty.

Item 1A.
Risk Factors
As of the date of this report, there have been no material changes to the information related to Item 1A entitled “RISK FACTORS” disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3.
Defaults Upon Senior Securities
None.

Item 4.
Mine Safety Disclosures
None.

Item 5.
Other Information
None.

Item 6.
Exhibits
See the Index to Exhibits immediately following the signature page hereto, which Index to Exhibits is incorporated herein by reference.


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
TOYS “R” US PROPERTY COMPANY II, LLC
 
 
(Registrant)
 
 
 
Date: December 17, 2013
 
/s/ F. Clay Creasey, Jr.
 
 
F. Clay Creasey, Jr.
 
 
President and Chief Financial Officer

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INDEX TO EXHIBITS
The following is a list of all exhibits filed or furnished as part of this report:
Exhibit No.
  
Description
 
 
 
3.1
  
Amended and Restated Certificate of Formation of Toys “R” Us Property Company II, LLC (filed as Exhibit 3.1 to Registrant’s Form S-4 registration statement, filed on August 4, 2010 and incorporated herein by reference).
 
 
 
3.2
  
Second Amended and Restated Limited Liability Company Agreement of Toys “R” Us Property Company II, LLC (filed as Exhibit 3.2 to the Registrant’s Form S-4 registration statement, filed on August 4, 2010 and incorporated herein by reference).
 
 
 
31.1
  
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a – 14(a) and Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
  
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
99.1
  
Toys “R” Us – Delaware, Inc. financial statements for the thirteen and thirty-nine weeks ended November 2, 2013 (filed as Exhibit 99.1 to the Form 8-K filed by Toys “R” Us, Inc. on December 17, 2013 and incorporated herein by reference).
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

15