Table of Contents

 

 

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 October 30, 2010

Commission file number 333-164018

 

 

Toys “R” Us Property Company I, LLC

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		04-3829291
(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  x    No  ¨

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  ¨    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 14, 2010, all of our outstanding membership interests were privately held by our sole member, Wayne Real Estate Holding Company, LLC.

 

 

 

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TOYS “R” US PROPERTY COMPANY I, LLC AND SUBSIDIARIES

TABLE OF CONTENTS

 

		PAGE
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of October 30, 2010 and January 30, 2010		3
Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October  30, 2010 and October 31, 2009		4
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 30, 2010 and October 31, 2009		5
Condensed Consolidated Statements of Changes in Member’s Capital (Deficit) for the thirty-nine weeks ended October 30, 2010 and October 31, 2009		6
Notes to the Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3. Quantitative and Qualitative Disclosures About Market Risk		15
Item 4. Controls and Procedures		16
PART II – OTHER INFORMATION
Item 1. Legal Proceedings		17
Item 1A. Risk Factors		17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		17
Item 3. Defaults Upon Senior Securities		17
Item 4. (Removed and Reserved)		17
Item 5. Other Information		17
Item 6. Exhibits		17
SIGNATURE		18
INDEX TO EXHIBITS		19

 

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PART 1 – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

TOYS “R” US PROPERTY COMPANY I, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands)		October 30,     2010				January 30,     2010
ASSETS
Current Assets:
Cash		$	52,228			$	25,037
Net properties held for sale			11,551				1,240
Due from affiliates, net			934				1,956
Total current assets			64,713				28,233
Real Estate, Net:
Land			279,286				285,391
Buildings, net			516,518				533,688
Leasehold improvements, net			130,136				148,246
Total real estate, net			925,940				967,325
Straight-line rent receivable from affiliates			91,903				69,015
Debt issuance costs, net			19,632				21,400
Other assets			292				344
		$	1,102,480			$	1,086,317
LIABILITIES AND MEMBER’S CAPITAL
Current Liabilities:
Accrued interest and other current liabilities		$	29,942			$	5,344
Deferred third party rent liabilities			887				422
Deferred related party revenue			463				465
Total current liabilities			31,292				6,231
Long-term debt			928,045				926,444
Deferred third party rent liabilities			103,230				91,321
Other non-current liabilities			28				28
Member’s capital			39,885				62,293
		$	1,102,480			$	1,086,317

See Notes to the Condensed Consolidated Financial Statements.

 

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TOYS “R” US PROPERTY COMPANY I, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		13 Weeks Ended								39 Weeks Ended
(In thousands)		October 30,   2010				October 31,   2009				October 30,   2010				October 31,   2009
Rental revenues:
Base rents		$	60,829			$	60,940			$	185,919			$	171,901
Tenant reimbursements			9,670				10,521				30,742				31,985
Total revenues			70,499				71,461				216,661				203,886
Depreciation			8,525				7,603				28,026				27,331
Rental expense			12,447				11,919				38,999				35,795
Common area maintenance expenses			9,670				10,521				30,742				31,985
Other operating expenses			1,478				1,608				4,897				5,055
Total operating expenses			32,120				31,651				102,664				100,166
Operating earnings			38,379				39,810				113,997				103,720
Interest expense			26,528				26,493				80,283				61,735
Earnings from continuing operations			11,851				13,317				33,714				41,985
(Loss) earnings from discontinued operations			(487)				342				(517)				4,545
Net earnings		$	11,364			$	13,659			$	33,197			$	46,530

See Notes to the Condensed Consolidated Financial Statements.

 

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TOYS “R” US PROPERTY COMPANY I, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		39 Weeks Ended
(In thousands)		October 30,     2010				October 31,     2009
Cash Flows from Operating Activities:
Net earnings		$	33,197			$	46,530
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			29,375				28,885
Amortization of debt issuance costs			2,161				11,109
Amortization of original issue discount			1,601				641
Loss on sale of real estate			333				-
Impairment loss			461				-
Changes in operating assets and liabilities:
Accrued interest and other current liabilities			24,569				27,990
Due from affiliates, net			1,022				(2,263)
Straight-line rent receivable from affiliates, other assets, and deferred third party rent liabilities			(16,061)				(11,547)
Deferred related party revenue			(2)				(14,181)
Net cash provided by operating activities			76,656				87,164
Cash Flows from Investing Activities:
Proceeds from the sale of real estate			907				-
Sales of net assets to affiliates at carrying value			-				58,723
Decrease in restricted cash			-				112,775
Net cash provided by investing activities			907				171,498
Cash Flows from Financing Activities:
Long-term debt borrowings			-				925,291
Long-term debt repayments			-				(1,300,000)
Amounts received in excess of carrying values of net assets sold			-				65,710
Capital contributions			-				141,920
Distributions			(50,006)				(26,942)
Capitalized debt issuance/extension costs			(366)				(22,835)
Net cash used in financing activities			(50,372)				(216,856)
Cash:
Net increase during period			27,191				41,806
Cash at beginning of period			25,037				330
Cash at end of period		$	52,228			$	42,136
Supplemental Disclosure of Cash Flow Information:
Interest paid		$	51,063			$	24,911
Non-Cash Financing Information:
Adjustment to the carrying value of net assets previously acquired		$	(5,599)			$	-

See Notes to the Condensed Consolidated Financial Statements.

 

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TOYS “R” US PROPERTY COMPANY I, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER’S CAPITAL (DEFICIT)

(Unaudited)

 

(In thousands)		Member’s Capital     (Deficit)
Balance, January 31, 2009		$	(167,272)
Net earnings for the period			46,530
Total comprehensive income			46,530
Capital contributions			141,920
Amounts received in excess of carrying values of net assets sold			65,710
Distributions			(26,942)
Balance, October 31, 2009		$	59,946
Balance, January 30, 2010		$	62,293
Net earnings for the period			33,197
Total comprehensive income			33,197
Adjustment to the carrying value of net assets previously acquired			(5,599)
Distributions			(50,006)
Balance, October 30, 2010		$	39,885

See Notes to the Condensed Consolidated Financial Statements.

 

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TOYS “R” US PROPERTY COMPANY I, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of presentation

As used herein, the “Company,” “we,” “us,” or “our” means Toys “R” Us Property Company I, LLC (formerly known as TRU 2005 RE Holding Co. I, LLC) and its subsidiaries, except as expressly indicated or unless the context otherwise requires. We generate substantially all of our revenues, earnings and cash flows by leasing or subleasing properties primarily to our affiliate, Toys “R” Us – Delaware, Inc. (“Toys-Delaware”). The Condensed Consolidated Balance Sheets as of October 30, 2010 and January 30, 2010, the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009, the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Statements of Changes in Member’s Capital (Deficit) for the thirty-nine weeks ended October 30, 2010 and October 31, 2009, 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 Consolidated 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 Consolidated Balance Sheet at January 30, 2010, presented herein, has been derived from our audited balance sheet for the fiscal year ended January 30, 2010 included in our Amendment No. 3 to the registration statement under the Securities Act of 1933 which was filed on May 13, 2010, but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included within our Amendment No. 3 to the registration statement. The results of operations for the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009 are not necessarily indicative of operating results for the full year.

Prior Period Correction

In the second quarter of fiscal 2010, we recorded an approximate $8 million adjustment to increase Deferred third party rent liabilities on our Condensed Consolidated Balance Sheet to correct a cumulative prior period straight-line lease accounting error. A portion of this correction related to the understatement of straight-line lease expense that occurred prior to the fiscal 2005 reorganization transactions when the related assets were sold to us from affiliates. As a result, the carrying value of the net assets sold to us during these transactions was overstated by approximately $6 million and was recorded as a reduction of Member’s Capital. The remaining portion of the correction of approximately $2 million increased Rental expense on the Condensed Consolidated Statement of Operations. In addition, in connection with our master lease agreements, a corresponding correcting adjustment was recorded of approximately $2 million to increase Base rents on the Condensed Consolidated Statement of Operations and Straight-line rent receivable from affiliates on the Condensed Consolidated Balance Sheet for the period subsequent to the fiscal 2005 reorganization. Management concluded that this correction did not have a material impact on the current or any previously reported financial statements.

2. Real estate, net

 

(In thousands)		October 30,     2010				January 30,     2010
Land		$	279,286			$	285,391
Buildings			755,597				764,172
Leasehold improvements			414,800				417,424
			1,449,683				1,466,987
Less: accumulated depreciation			(523,743)				(499,662)
Total		$	925,940			$	967,325

 

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Net properties held for sale

The following assets were classified as held for sale as of October 30, 2010 and January 30, 2010:

 

(In thousands)		October 30,     2010				January 30,     2010
Land		$	6,105			$	1,021
Buildings			8,115				1,504
Leasehold improvements			2,625				65
			16,845				2,590
Less: accumulated depreciation			(5,294)				(1,350)
Total		$	11,551			$	1,240

During the third quarter of fiscal 2010, we classified three owned properties, which are currently leased to Toys-Delaware, as assets held for sale. The master lease agreement requires Toys-Delaware to make a payment to the Company upon termination of the lease in conjunction with the successful execution of the sale of such properties by the Company to a third party if the proceeds from the sale are less than the net present value of the base rent for such property over the remaining term for such property, discounted at 10% per annum. As of October 30, 2010, we recorded an impairment loss of less than $1 million for one of the properties, which is reflected in (Loss) earnings from discontinued operations in our Condensed Consolidated Statements of Operations.

During the first quarter of fiscal 2010, we sold the property classified as held for sale to an unrelated third party for gross proceeds of approximately $1 million, which resulted in a loss of less than $1 million, and was recorded in Other operating expenses.

3. Discontinued operations

During the third quarter of fiscal 2010, we classified three owned properties as assets held for sale. We have reported the operating results for these properties as (Loss) earnings from discontinued operations in the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively. In addition, during the third quarter of fiscal 2010, we recorded an impairment loss of less than $1 million for one of the properties, which is reflected in the (Loss) earnings from discontinued operations.

The operating results of these three owned properties classified as discontinued operations through October 30, 2010 were derived from our historical financial information and have been segregated from continuing operations and reported separately in the Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009, respectively. These amounts have been summarized below:

 

		13 Weeks Ended
(In thousands)		October 30,     2010				October 31,     2009
Total revenues		$	502			$	507
(Loss) earnings from discontinued operations		$	(487	)		$	342
		39 Weeks Ended
(In thousands)		October 30, 2010				October 31, 2009
Total revenues		$	1,493			$	1,424
(Loss) earnings from discontinued operations		$	(517	)		$	924

 

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On July 9, 2009, we sold 11 owned properties and transferred the leasehold interest in 14 leased properties (collectively, the “Transferred Properties”) to Toys-Delaware for $124 million. The carrying amount of the net assets transferred was approximately $59 million. Since this sale occurred between entities under common control, the difference between the cash received and the net assets transferred out of approximately $65 million was included in Capital contributions in connection with the sale of properties in the Condensed Consolidated Statement of Changes in Member’s Capital (Deficit) for the fiscal year ended January 30, 2010. We reported the operating results for the Transferred Properties as Earnings from discontinued operations in our Condensed Consolidated Statement of Operations for the thirty-nine weeks ended October 31, 2009.

The operating results of these 11 sold properties classified as discontinued operations through July 9, 2009 were derived from our historical financial information and have been segregated from continuing operations and reported separately in the Condensed Consolidated Statement of Operations for the thirty-nine weeks ended October 31, 2009. These amounts have been summarized below:

 

		39 Weeks Ended
(In thousands)		October 30, 2010				October 31,     2009
Total revenues		$	-			$	10,554
Earnings from discontinued operations		$	-			$	3,621

4. Long-term debt

On July 9, 2009, we completed the offering of $950 million aggregate principal amount of senior unsecured 10.75% notes due fiscal 2017 (the “Notes”). The indenture governing the Notes contains covenants, including, among other things, covenants that restrict the ability of us and our subsidiaries to incur additional indebtedness, pay dividends or make other distributions, make other restricted payments and investments and create liens. The amount of our net assets that were subject to these restrictions was approximately $40 million and $62 million as of October 30, 2010 and January 30, 2010, respectively. The indenture governing the Notes also contains covenants that limit the ability of Toys “R” Us, Inc. (“TRU”) to cause or permit Toys-Delaware to incur indebtedness or make restricted payments.

On July 8, 2010, pursuant to a registration rights agreement that we entered into in connection with the offering of the Notes, we completed a registered exchange offer with respect to the Notes.

In accordance with the indenture governing the Notes, we commenced a tender offer on June 25, 2010 to purchase for cash, up to an aggregate amount of approximately $25 million at par. The tender offer expired on July 26, 2010 with no holders opting to tender at that time.

As of October 30, 2010 and January 30, 2010, the carrying value of our debt was $928 million and $926 million, respectively, with fair values of approximately $1,083 million and $1,052 million, respectively. The fair values of our long-term debt are estimated using the quoted market prices for the same or similar issues.

5. Member’s capital (deficit)

Wayne Real Estate Holding Company, LLC, a direct wholly-owned subsidiary of TRU, is the direct owner of 100% of the limited liability company interest in us. We evaluate our cash balances on an ongoing basis to determine if we can distribute cash to our parent companies. From time to time a portion of our cash may also be used to tender for a portion of the outstanding Notes as permitted by the indenture governing the Notes. If holders of the Notes elect not to tender their Notes, we may, at such time, in accordance with the indenture governing the Notes, make certain restricted payments, including distributing cash to TRU. During the thirty-nine weeks ended October 30, 2010, we made cash distributions of $33 million and $17 million in dividends and return of capital, respectively. During the thirty-nine weeks ended October 31, 2009, we made cash distributions of $27 million in dividends.

As described in Note 1 entitled “Basis of presentation,” we have recorded an approximate $6 million Adjustment to the carrying value of net assets previously acquired on the Condensed Consolidated Statement of Changes in Member’s Capital (Deficit) to correct the initial carrying value of net assets contributed to us as part of the fiscal 2005 reorganization transactions. Management concluded that this correction did not have a material impact on the current or any previously reported financial statements.

 

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6. Related party transactions

Rental Revenues

Our rental revenue is derived from payments received under the master lease agreements we have entered into with Toys-Delaware. The master lease agreements require 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 we record such costs both as an expense and a tenant reimbursement. During the thirteen weeks ended October 30, 2010 and October 31, 2009, we earned related party Base rent revenues of approximately $60 million and $61 million, respectively. During the thirty-nine weeks ended October 30, 2010 and October 31, 2009, we earned related party Base rent revenues of approximately $185 million and $179 million, respectively. In addition, under our leasing arrangements with Toys-Delaware, during the thirteen weeks ended October 30, 2010 and October 31, 2009, we recorded Tenant reimbursements of approximately $10 million and $11 million, respectively. During the thirty-nine weeks ended October 30, 2010 and October 31, 2009, we recorded Tenant reimbursements of approximately $31 million and $34 million, respectively.

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 the Domestic Service Agreement (“Service Agreement”). The costs are allocated based on a formula for each affiliate, as defined in the Service Agreement. During each of the thirteen week periods ended October 30, 2010 and October 31, 2009, the amount charged to us for these services was approximately $1 million, respectively. During the thirty-nine weeks ended October 30, 2010 and October 31, 2009, the amount charged to us for these services was approximately $4 million, respectively.

Transactions with the Sponsors

Our indirect parent, TRU, is owned by an investment group consisting of entities advised by or affiliated with Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co. L.P., and Vornado Realty Trust (collectively, the “Sponsors”). From time to time, the Sponsors or their affiliates may acquire our debt in open market transactions or through loan syndications. Through July 9, 2009, the Sponsors and their affiliates had held debt issued by the Company. As a result of the completion of the offering of the Notes on July 9, 2009, the Sponsors and their affiliates no longer own a portion of such debt. The interest amounts paid on such debt held by related parties for the thirty-nine weeks ended October 31, 2009 was $2 million.

7. Due from affiliates, net

As of October 30, 2010 and January 30, 2010, Due from affiliates, net, of approximately $1 million and $2 million, respectively, primarily represents Base rents owed to us by Toys-Delaware.

 

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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 I, LLC and its subsidiaries, 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 Condensed Consolidated 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”). Certain of our wholly-owned special purpose subsidiaries own fee and leasehold interests in 358 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 “R” Us – Delaware, Inc. (“Toys-Delaware”), the operating entity for all of TRU’s North American businesses. 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 I Master Lease”). For quarterly financial statements and other information about our master tenant, Toys-Delaware, see Exhibit number 99.1 to this report.

Results of Operations

Earnings from Continuing Operations

 

		13 Weeks Ended																39 Weeks Ended
($ In thousands)		October 30,     2010				October 31,     2009				$ Change				% Change				October 30,     2010				October 31,     2009				$ Change				% Change
Earnings from continuing operations		$	11,851			$	13,317			$	(1,466)				(11.0)%			$	33,714			$	41,985			$	(8,271)				(19.7)%

Earnings from continuing operations decreased by $1.5 million, or 11.0%, to $11.8 million for the thirteen weeks ended October 30, 2010, compared to $13.3 million for the thirteen weeks ended October 31, 2009. Earnings from continuing operations decreased primarily due to an increase of $0.9 million in Depreciation expense and an increase of $0.5 million in Rental expense.

Earnings from continuing operations decreased by $8.3 million, or 19.7% to $33.7 million for the thirty-nine weeks ended October 30, 2010, compared to $42.0 million for the thirty-nine weeks ended October 31, 2009. Earnings from continuing operations decreased primarily due to an increase of $18.5 million in Interest expense and an increase of $3.2 million in Rental expense. These increases were partially offset by an increase of $12.8 million in Total revenues driven by an increase in Base rents.

Total Revenues

 

		13 Weeks Ended																39 Weeks Ended
($ In thousands)		October 30,     2010				October 31,     2009				$ Change				% Change				October 30,     2010				October 31,     2009				$ Change				% Change
Total revenues		$	70,499			$	71,461			$	(962)				(1.3)%			$	216,661			$	203,886			$	12,775				6.3%

Total revenues decreased by $1.0 million, or 1.3%, to $70.5 million for the thirteen weeks ended October 30, 2010, compared to $71.5 million for the thirteen weeks ended October 31, 2009. The decrease was primarily due to a reduction in Tenant reimbursements.

Total revenues increased by $12.8 million, or 6.3%, to $216.7 million for the thirty-nine weeks ended October 30, 2010, compared to $203.9 million for the thirty-nine weeks ended October 31, 2009. The increase was primarily due to the increase in Base rents as a result of the amendments in the TRU Propco I Master Lease on July 9, 2009, partially offset by a reduction in Tenant reimbursements.

 

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Depreciation

 

		13 Weeks Ended																39 Weeks Ended
($ In thousands)		October 30,   2010				October 31,   2009				$ Change				% Change				October 30,   2010				October 31,   2009				$ Change				% Change
Depreciation		$	8,525			$	7,603			$	922				12.1%			$	28,026			$	27,331			$	695				2.5%

Depreciation increased by $0.9 million, or 12.1%, to $8.5 million for the thirteen weeks ended October 30, 2010, compared to $7.6 million for the thirteen weeks ended October 31, 2009, and increased by $0.7 million, or 2.5%, to $28.0 million for the thirty-nine weeks ended October 30, 2010, compared to $27.3 million for the thirty-nine weeks ended October 31, 2009.

Rental Expense

 

		13 Weeks Ended																39 Weeks Ended
($ In thousands)		October 30,   2010				October 31,   2009				$ Change				% Change				October 30,   2010				October 31,   2009				$ Change				% Change
Rental expense		$	12,447			$	11,919			$	528				4.4%			$	38,999			$	35,795			$	3,204				9.0%

Rental expense increased by $0.5 million, or 4.4%, to $12.4 million for the thirteen weeks ended October 30, 2010, compared to $11.9 million for the thirteen weeks ended October 31, 2009, and increased by $3.2 million, or 9.0%, to $39.0 million for the thirty-nine weeks ended October 30, 2010, compared to $35.8 million for the thirty-nine weeks ended October 31, 2009. For the thirty-nine weeks, the increase was primarily due to a $2.5 million non-cash cumulative correction of prior period straight-line lease accounting.

Common Area Maintenance Expenses

 

		13 Weeks Ended																39 Weeks Ended
($ In thousands)		October 30,   2010				October 31,   2009				$ Change				% Change				October 30,   2010				October 31,   2009				$ Change				% Change
Common area maintenance expenses		$	9,670			$	10,521			$	(851)				(8.1)%			$	30,742			$	31,985			$	(1,243)				(3.9)%

Common area maintenance expenses decreased by $0.8 million, or 8.1%, to $9.7 million for the thirteen weeks ended October 30, 2010, compared to $10.5 million for the thirteen weeks ended October 31, 2009, and decreased by $1.2 million, or 3.9%, to $30.7 million for the thirty-nine weeks ended October 30, 2010, compared to $31.9 million for the thirty-nine weeks ended October 31, 2009. These expenses are fully reimbursed by our tenant under the TRU Propco I 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)		October 30,   2010				October 31,   2009				$ Change				% Change				October 30,   2010				October 31,   2009				$ Change				% Change
Other operating expenses		$	1,478			$	1,608			$	(130)				(8.1)%			$	4,897			$	5,055			$	(158)				(3.1)%

Other operating expenses had nominal decreases for the thirteen and thirty-nine weeks ended October 30, 2010, compared to the same periods last year.

 

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Interest Expense

 

		13 Weeks Ended																39 Weeks Ended
($ In thousands)		October 30,   2010				October 31,   2009				$ Change				% Change				October 30,   2010				October 31,   2009				$ Change				% Change
Interest expense		$	26,528			$	26,493			$	35				0.1%			$	80,283			$	61,735			$	18,548				30.0%

Interest expense had a nominal increase for the thirteen weeks ended October 30, 2010, compared to the same period last year.

Interest expense increased by $18.5 million, or 30.0%, to $80.2 million for the thirty-nine weeks ended October 30, 2010, compared to $61.7 million for the thirty-nine weeks ended October 31, 2009. The increase was primarily due to higher effective interest rates related to the prior year issuance of 10.75% senior notes due fiscal 2017 (the “Notes”), partially offset by a lower average debt balance in the current year and the write-off of $7.9 million of deferred financing costs related to the unsecured credit agreement in the prior year.

(Loss) Earnings from Discontinued Operations

 

		13 Weeks Ended																39 Weeks Ended
($ In thousands)		October 30,   2010				October 31,   2009				$ Change				% Change				October 30,   2010				October 31,   2009				$ Change				% Change
(Loss) earnings from discontinued operations		$	(487	)		$	342			$	(829	)			(242.4)%			$	(517	)		$	4,545			$	(5,062	)			(111.4)%

Earnings from discontinued operations decreased by $0.8 million to a loss of $0.5 million for the thirteen weeks ended October 30, 2010, compared to earnings of $0.3 million for the thirteen weeks ended October 31, 2009. During the third quarter of fiscal 2010, we classified three owned properties as assets held for sale and recognized an impairment loss of $0.5 million as well as accelerated depreciation related to locations identified for disposal in fiscal 2010. See Note 3 to the Condensed Consolidated Financial Statements entitled “Discontinued operations” for further details.

Earnings from discontinued operations decreased by $5.0 million to a loss of $0.5 million for the thirty-nine weeks ended October 30, 2010, compared to earnings of $4.5 million for the thirty-nine weeks ended October 31, 2009. The decrease is due to the operations of 11 sold properties and 14 transferred properties (collectively, the “Transferred Properties”) being included in our operating results for the thirty-nine weeks ended October 31, 2009, while the Transferred Properties are no longer included in the current year operating results as they were sold on July 9, 2009. In addition, during the third quarter of fiscal 2010, we classified three owned properties as assets held for sale and recognized an impairment loss of $0.5 million as well as accelerated depreciation related to locations identified for disposal in fiscal 2010. See Note 3 to the Condensed Consolidated Financial Statements entitled “Discontinued operations” for further details.

Liquidity and Capital Resources

Overview

As of October 30, 2010, we were in compliance with all of our covenants related to the Notes.

Our largest source of operating cash flows is cash collections from our lessees. In general, we utilize our cash to service debt, pay normal operating costs and, at the discretion of our board of directors and as permitted by the indenture governing the Notes, declare and pay dividends. From time to time a portion of our cash may also be used to tender a portion of the outstanding Notes as permitted by the indenture governing the Notes. Refer to Note 4 to the Condensed Consolidated Financial Statements entitled “Long-term debt” for further details regarding the tender of the Notes. We have been able to meet our 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.

 

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Cash Flows

 

		39 Weeks Ended
(In thousands)		October 30, 2010				October 31, 2009				$ Change
Net cash provided by operating activities		$	76,656			$	87,164			$	(10,508)
Net cash provided by investing activities			907				171,498				(170,591)
Net cash used in financing activities			(50,372)				(216,856)				166,484
Net increase in cash during period		$	27,191			$	41,806			$	(14,615)

Cash Flows Provided by Operating Activities

Net cash provided by operating activities for the thirty-nine weeks ended October 30, 2010 was $76.7 million, a decrease of $10.5 million compared to the same period last year. The decrease in cash provided by operating activities was primarily due to higher effective interest rates, which resulted in a $26.2 million increase in interest payments made during the period, partially offset by a change in the timing of rental payments received from our tenant under the TRU Propco I Master Lease.

Cash Flows Provided by Investing Activities

Net cash provided by investing activities for the thirty-nine weeks ended October 30, 2010 was $0.9 million, a decrease of $170.6 million compared to the same period last year. The decrease in net cash provided by investing activities was primarily due to the release of all restricted cash as a result of the repayment of the outstanding loan balance under our unsecured credit agreement on July 9, 2009, and prior year proceeds from the Transferred Properties.

Cash Flows Used in Financing Activities

Net cash used in financing activities for the thirty-nine weeks ended October 30, 2010 was $50.4 million, a decrease of $166.5 million compared to the same period last year. The decrease in net cash used in financing activities was primarily due to the prior year repayment of our unsecured credit agreement of $1,300.0 million on July 9, 2009 and a decrease of $22.5 million in capitalized debt issuance costs. These were partially offset by additional borrowings of $925.3 million related to the Notes, a decrease in Contributions of $141.9 million, Amounts received in excess of carrying values of net assets sold of $65.7 million in the prior year period and an increase in Distributions of $23.1 million.

Debt

Refer to Note 4 to the Condensed Consolidated Financial Statements entitled “Long-term debt” for further details regarding the transaction described below.

On July 8, 2010, pursuant to a registration rights agreement that we entered into in connection with the offering of the Notes, we completed a registered exchange offer with respect to the Notes. Additionally, in accordance with the indenture governing the Notes, we commenced a tender offer on June 25, 2010 to purchase for cash, up to an aggregate amount of approximately $25 million at par. The tender offer expired on July 26, 2010 with no holders opting to tender at that time.

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 Amendment No. 3 to the registration statement under the Securities Act of 1933 which was filed on May 13, 2010, for details on our contractual obligations and commitments.

Critical Accounting Policies

Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States. 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 Consolidated Financial Statements. Refer to the “Critical Accounting Policies” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Amendment No. 3 to the registration statement under the Securities Act of 1933 which was filed on May 13, 2010 for a discussion of critical accounting policies.

 

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Recently Adopted Accounting Pronouncements

In March 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-11, “Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”). ASU 2010-11 clarifies the only form of embedded credit derivative that is exempt from embedded derivative bifurcation requirements is one that is related only to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The amendments in this ASU are effective at the beginning of a reporting entity’s first fiscal quarter beginning after June 15, 2010. The adoption of ASU 2010-11 did not have an impact on the Condensed Consolidated Financial Statements.

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). This ASU provides amendments that will require more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption of ASU 2010-06 did not have an impact on the Condensed Consolidated Financial Statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “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, which are intended to be covered by the safe harbors created thereby. All statements herein 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,” “expect,” “believe,” “intend,” “foresee,” “will,” “may,” 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, competition in the retail industry, seasonality of Toys-Delaware’s business, changes in consumer preferences and consumer spending patterns, general economic conditions in the United States and other countries in which we and Toys-Delaware conduct our business, Toys-Delaware’s ability to implement its strategy, our, Toys-Delaware’s and TRU’s respective substantial level of indebtedness and related debt-service obligations and the covenants in their and our respective debt agreements, availability of adequate financing to us, Toys-Delaware and TRU, Toys-Delaware’s dependence on key vendors of merchandise, international events affecting the delivery of toys and other products to Toys-Delaware’s stores, and such risks, uncertainties and factors set forth in our reports and documents filed with the United States Securities and Exchange Commission (which reports and documents should be read in conjunction with this Quarterly Report on Form 10-Q). 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. 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 significant change in our exposure to market risk during the thirteen and thirty-nine weeks ended October 30, 2010. For a discussion of our exposure to market risk, refer to the “Quantitative and Qualitative Disclosures about Market Risk” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended January 30, 2010 in our Amendment No. 3 to the registration statement under the Securities Act of 1933 which was filed on May 13, 2010.

 

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Item 4.

Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are the controls and other procedures that are designed to provide reasonable assurance 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.

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 the Company’s 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.

 

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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 the “Risk Factors” disclosed in the Amendment No. 3 to the registration statement under the Securities Act of 1933 which was filed on May 13, 2010.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

(Removed and Reserved)

 

Item 5.

Other Information

None.

 

Item 6.

Exhibits

Required exhibits are listed in the Index to Exhibits and are 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 I, LLC (Registrant)
Date: December 14, 2010						/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 TRU 2005 RE Holding Co., I, LLC, changing its name from TRU 2005 RE Holding Co. I, LLC to Toys “R” Us Property Company I, LLC (filed as Exhibit 3.1 to the Registrant’s Form S-4 registration statement, filed on December 24, 2009 and incorporated herein by reference).
3.2		Second Amended and Restated Limited Liability Company Agreement of Toys “R” Us Property Company I, LLC (filed as Exhibit 3.2 to the Registrant’s Form S-4 registration statement, filed on December 24, 2009 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 (filed as Exhibit 99.1 to the Form 8-K filed by Toys “R” Us, Inc. on December 14, 2010 and incorporated herein by reference).

 

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