Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION OF P.E.O. AND P.F.O. PURSUANT TO SECTION 906 - Toys R Us Property Co II, LLC | truprop210312015-exx321.htm |
| EX-31.1 - CERTIFICATION OF P.E.O. AND P.F.O. PURSUANT TO SECTION 302 - Toys R Us Property Co II, LLC | truprop210312015-exx311.htm |
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 31, 2015 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(a) or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13(a) 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 15, 2015, 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 I – FINANCIAL INFORMATION
Item 1. | Financial Statements |
TOYS “R” US PROPERTY COMPANY II, LLC
CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands) | October 31, 2015 | January 31, 2015 | ||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 98,288 | $ | 66,398 | ||||
Due from affiliate, net | 4,219 | 3,436 | ||||||
Prepaid expenses | 1,806 | 1,450 | ||||||
Total current assets | 104,313 | 71,284 | ||||||
Real Estate, Net: | ||||||||
Land | 165,100 | 165,677 | ||||||
Buildings, net | 139,821 | 144,729 | ||||||
Property and leasehold improvements, net | 22,996 | 27,061 | ||||||
Total real estate, net | 327,917 | 337,467 | ||||||
Straight-line rent receivable from affiliate | 97,659 | 95,029 | ||||||
Debt issuance costs | 7,435 | 10,145 | ||||||
Total Assets | $ | 537,324 | $ | 513,925 | ||||
LIABILITIES AND MEMBER’S DEFICIT | ||||||||
Current Liabilities: | ||||||||
Accrued interest | $ | 25,761 | $ | 10,497 | ||||
Real estate taxes payable | 5,536 | 4,538 | ||||||
Deferred third party rent liabilities | 4 | 4 | ||||||
Other current liabilities | 252 | 314 | ||||||
Total current liabilities | 31,553 | 15,353 | ||||||
Long-term debt | 721,615 | 720,542 | ||||||
Deferred third party rent liabilities | 13,974 | 13,713 | ||||||
Member’s deficit | (229,818 | ) | (235,683 | ) | ||||
Total Liabilities and Member’s Deficit | $ | 537,324 | $ | 513,925 | ||||
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) | October 31, 2015 | November 1, 2014 | October 31, 2015 | November 1, 2014 | ||||||||||||
Rental revenues: | ||||||||||||||||
Base rents | $ | 25,534 | $ | 25,658 | $ | 79,312 | $ | 80,584 | ||||||||
Tenant reimbursements | 3,446 | 3,213 | 10,164 | 9,628 | ||||||||||||
Total revenues | 28,980 | 28,871 | 89,476 | 90,212 | ||||||||||||
Depreciation | 2,572 | 2,691 | 7,932 | 8,261 | ||||||||||||
Rental expense | 666 | 678 | 2,015 | 2,035 | ||||||||||||
Common area maintenance expenses | 3,446 | 3,213 | 10,164 | 9,628 | ||||||||||||
Other operating expenses, net | 412 | 402 | 2,312 | 4,454 | ||||||||||||
Total operating expenses | 7,096 | 6,984 | 22,423 | 24,378 | ||||||||||||
Operating earnings | 21,884 | 21,887 | 67,053 | 65,834 | ||||||||||||
Interest expense, net | 16,562 | 16,549 | 49,799 | 49,743 | ||||||||||||
Net earnings | $ | 5,322 | $ | 5,338 | $ | 17,254 | $ | 16,091 | ||||||||
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) | October 31, 2015 | November 1, 2014 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net earnings | $ | 17,254 | $ | 16,091 | ||||
Adjustments to reconcile Net earnings to Net cash provided by operating activities: | ||||||||
Depreciation | 7,932 | 8,261 | ||||||
Amortization of debt issuance costs | 2,710 | 2,710 | ||||||
Amortization of original issue discount | 1,073 | 986 | ||||||
Loss on sale of real estate | 1,026 | 3,163 | ||||||
Changes in operating assets and liabilities: | ||||||||
Due from affiliate, net | (783 | ) | (127 | ) | ||||
Prepaid expenses | (356 | ) | (645 | ) | ||||
Straight-line rent receivable from affiliate and Deferred third party rent liabilities | (2,369 | ) | (8,887 | ) | ||||
Accrued interest, Real estate taxes payable and Other current liabilities | 16,200 | 16,071 | ||||||
Net cash provided by operating activities | 42,687 | 37,623 | ||||||
Cash Flows from Investing Activities: | ||||||||
Proceeds from sale of real estate | 592 | 1,355 | ||||||
Net cash provided by investing activities | 592 | 1,355 | ||||||
Cash Flows from Financing Activities: | ||||||||
Distributions | (11,389 | ) | (9,634 | ) | ||||
Net cash used in financing activities | (11,389 | ) | (9,634 | ) | ||||
Cash and cash equivalents: | ||||||||
Net increase during period | 31,890 | 29,344 | ||||||
Cash and cash equivalents at beginning of period | 66,398 | 49,178 | ||||||
Cash and cash equivalents at end of period | $ | 98,288 | $ | 78,522 | ||||
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, February 1, 2014 | $ | (244,275 | ) | |
Net earnings | 16,091 | |||
Distributions | (9,634 | ) | ||
Balance, November 1, 2014 | $ | (237,818 | ) | |
Balance, January 31, 2015 | $ | (235,683 | ) | |
Net earnings | 17,254 | |||
Distributions | (11,389 | ) | ||
Balance, October 31, 2015 | $ | (229,818 | ) | |
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 October 31, 2015 and January 31, 2015, the Condensed Statements of Operations for the thirteen and thirty-nine weeks ended October 31, 2015 and November 1, 2014, the Condensed Statements of Cash Flows and the Condensed Statements of Changes in Member’s Deficit for the thirty-nine weeks ended October 31, 2015 and November 1, 2014, 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 January 31, 2015, presented herein, has been derived from our audited balance sheet included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, 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 January 31, 2015.
2. Real estate, net
(In thousands) | October 31, 2015 | January 31, 2015 | ||||||
Land | $ | 165,100 | $ | 165,677 | ||||
Buildings | 262,786 | 264,695 | ||||||
Property and leasehold improvements | 127,998 | 128,300 | ||||||
555,884 | 558,672 | |||||||
Less: accumulated depreciation | (227,967 | ) | (221,205 | ) | ||||
Total | $ | 327,917 | $ | 337,467 | ||||
During each of the thirteen weeks ended October 31, 2015 and November 1, 2014, we did not dispose of any properties and had no leases expire with unrelated third party landlords. During the thirty-nine weeks ended October 31, 2015, we sold an owned property and a non-operating parcel to unrelated third parties for proceeds of $1 million, resulting in a net loss of $1 million, which is included in Other operating expenses, net. During the thirty-nine weeks ended November 1, 2014, we sold one owned property and a non-operating parcel to unrelated third parties for proceeds of $1 million, resulting in a net loss of $3 million.
The Amended and Restated Master Lease Agreement (the “TRU Propco II Master Lease”) requires Toys-Delaware to make a payment to us, as set forth under the terms of the TRU Propco II Master Lease, upon early termination of a 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. Termination payments are included in Base Rents in the Condensed Statements of Operations. We did not record any termination payments during the thirteen weeks ended October 31, 2015 and November 1, 2014. We recorded termination payments of $2 million and $3 million during the thirty-nine weeks ended October 31, 2015 and November 1, 2014, respectively.
5
3. 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).
Long-term Debt
As of October 31, 2015 and January 31, 2015, the fair value of our Long-term debt was $723 million and $719 million, respectively, which was estimated using Level 1 inputs, representing quoted market prices in reasonably active markets of our debt instrument.
Other Financial Instruments
Other financial instruments that are not measured at fair value on our Condensed Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. Due to the short-term nature of these assets and liabilities, their carrying amounts approximate fair value.
4. 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 October 31, 2015 and November 1, 2014, we made cash distributions of $11 million and $10 million in dividends, respectively.
5. 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 TRU Propco II Master Lease provides for Toys-Delaware to reimburse us for property related costs including, among others, real estate taxes and common area maintenance charges. 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 October 31, 2015 and November 1, 2014, we earned related party Base rent revenues of $25 million, excluding termination payments from Toys-Delaware. During each of the thirty-nine weeks ended October 31, 2015 and November 1, 2014, we earned related party Base rent revenues of $77 million, excluding termination payments from Toys-Delaware. In addition, we recorded Tenant reimbursements of $3 million and $4 million under the TRU Propco II Master Lease during the thirteen weeks ended October 31, 2015 and November 1, 2014, respectively. During each of the thirty-nine weeks ended October 31, 2015 and November 1, 2014, we recorded Tenant reimbursements of $10 million.
Termination Payments
As discussed in Note 2 entitled “Real estate, net,” the TRU Propco II Master Lease requires Toys-Delaware to make a payment to us, as set forth under the terms of the TRU Propco II Master Lease, upon early termination of a 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 during the thirteen weeks ended October 31, 2015 and November 1, 2014. We recorded termination payments of $2 million and $3 million during the thirty-nine weeks ended October 31, 2015 and November 1, 2014, 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 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, net on the Condensed Statements of Operations. During each of the thirteen weeks ended October 31, 2015 and November 1, 2014, the amounts charged to us for these services were less than $1 million. During each of the thirty-nine weeks ended October 31, 2015 and November 1, 2014, the amounts charged to us for these services were $1 million.
6
Transactions with the Sponsors
From time to time, 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”) or their affiliates may acquire our debt in open market transactions or through loan syndications. As of October 31, 2015 and November 1, 2014, the Sponsors or their affiliates did not own any of our debt.
Due from Affiliate, Net
As of October 31, 2015 and January 31, 2015, Due from affiliate, net of $4 million and $3 million, respectively, primarily represents real estate taxes, base rents and certain property reimbursements owed to us by Toys-Delaware.
6. Recent accounting pronouncements
In September 2015, the FASB issued Accounting Standards Update (“ASU”) ASU 2015-16 “Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Under the previous guidance, an acquirer must recognize adjustments to provisional amounts during the measurement period retrospectively (i.e. as if the accounting for the business combination had been completed at the acquisition date). That is, the acquirer must revise comparative information on the income statement and balance sheet for any prior periods affected. Under ASU 2015-16, acquirers must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The amendments in ASU 2015-16 require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earning by line item that would have been in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 did not change the criteria for determining whether an adjustment qualifies as a measurement-period adjustment and does not change the length of the measurement period. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of ASU 2015-16, is not expected to have an impact on our Condensed Financial Statements.
In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Under the previous practice, debt issuance costs were recognized as a deferred charge (that is, an asset). This ASU will create consistencies with the guidance in International Financial Reporting Standards as well as the guidance in FASB Concepts Statement No. 6, “Elements of Financial Statements,” which states that debt issuance costs are similar to debt discounts and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. In August 2015, the FASB issued ASU 2015-15 “Interest - Imputed Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”), which clarifies that the guidance in ASU 2015-03 does not apply to line-of-credit arrangements. According to ASU 2015-15, line-of-credit arrangements will continue to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt costs ratably over the term of the arrangement. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The amendments in ASU 2015-03 are effective for reporting periods beginning after December 15, 2015, with early adoption permitted. A reporting entity should apply the amendments on a retrospective basis to all prior periods presented in the financial statements. Other than the revised balance sheet presentation of debt issuance costs from an asset to a deduction from the carrying amount of the debt liability and related disclosures, the adoption of ASU 2015-03 is not expected to have an impact on our Condensed Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. As a result of the FASB issuing ASU 2015-14 “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date” in August 2015, the amendments in this ASU are effective for reporting periods beginning after December 15, 2017, and early adoption is prohibited. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is
7
currently assessing the adoption methodology and the impact the adoption of ASU 2014-09 will have on our Condensed Financial Statements.
8
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 January 31, 2015 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 123 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
Total Revenues
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||||||||||
($ In thousands) | October 31, 2015 | November 1, 2014 | $ Change | % Change | October 31, 2015 | November 1, 2014 | $ Change | % Change | ||||||||||||||||||||||
Total revenues | $ | 28,980 | $ | 28,871 | $ | 109 | 0.4 | % | $ | 89,476 | $ | 90,212 | $ | (736 | ) | (0.8 | )% | |||||||||||||
Total revenues increased by $0.1 million for the thirteen weeks ended October 31, 2015, compared to the same period last year.
Total revenues decreased by $0.7 million for the thirty-nine weeks ended October 31, 2015, compared to the same period last year, primarily due to a $1.0 million decline in termination payments as required under the TRU Propco II Master Lease partially offset by an increase in Tenant reimbursements predominantly related to real estate taxes.
Depreciation
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||||||||||
($ In thousands) | October 31, 2015 | November 1, 2014 | $ Change | % Change | October 31, 2015 | November 1, 2014 | $ Change | % Change | ||||||||||||||||||||||
Depreciation | $ | 2,572 | $ | 2,691 | $ | (119 | ) | (4.4 | )% | $ | 7,932 | $ | 8,261 | $ | (329 | ) | (4.0 | )% | ||||||||||||
Depreciation decreased by $0.1 million and $0.3 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, compared to the same periods last year. The decrease in both periods was due to assets that were fully depreciated.
Rental Expense
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||||||||||
($ In thousands) | October 31, 2015 | November 1, 2014 | $ Change | % Change | October 31, 2015 | November 1, 2014 | $ Change | % Change | ||||||||||||||||||||||
Rental expense | $ | 666 | $ | 678 | $ | (12 | ) | (1.8 | )% | $ | 2,015 | $ | 2,035 | $ | (20 | ) | (1.0 | )% | ||||||||||||
Rental expense decreased by less than $0.1 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, compared to the same periods last year.
9
Common Area Maintenance Expenses
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||||||||||
($ In thousands) | October 31, 2015 | November 1, 2014 | $ Change | % Change | October 31, 2015 | November 1, 2014 | $ Change | % Change | ||||||||||||||||||||||
Common area maintenance expenses | $ | 3,446 | $ | 3,213 | $ | 233 | 7.3 | % | $ | 10,164 | $ | 9,628 | $ | 536 | 5.6 | % | ||||||||||||||
Common area maintenance expenses increased by $0.2 million and $0.5 million for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, compared to the same periods last year. The increase in both periods was primarily due to an increase in Real estate taxes. These expenses are fully reimbursed by our tenant under the TRU Propco II Master Lease, and are reflected in Tenant reimbursements, which is a component of Total revenues.
Other Operating Expenses, Net
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||||||||||
($ In thousands) | October 31, 2015 | November 1, 2014 | $ Change | % Change | October 31, 2015 | November 1, 2014 | $ Change | % Change | ||||||||||||||||||||||
Other operating expenses, net | $ | 412 | $ | 402 | $ | 10 | 2.5 | % | $ | 2,312 | $ | 4,454 | $ | (2,142 | ) | (48.1 | )% | |||||||||||||
Other operating expenses, net remained relatively consistent for the thirteen weeks ended October 31, 2015, compared to the same period last year.
Other operating expenses, net decreased by $2.1 million for the thirty-nine weeks ended October 31, 2015, compared to the same period last year. The decrease was primarily due to a decline in the net loss on sales of properties of $2.1 million.
Interest Expense, Net
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||||||||||
($ In thousands) | October 31, 2015 | November 1, 2014 | $ Change | % Change | October 31, 2015 | November 1, 2014 | $ Change | % Change | ||||||||||||||||||||||
Interest expense, net | $ | 16,562 | $ | 16,549 | $ | 13 | 0.1 | % | $ | 49,799 | $ | 49,743 | $ | 56 | 0.1 | % | ||||||||||||||
Interest expense, net remained relatively consistent for the thirteen and thirty-nine weeks ended October 31, 2015, respectively, compared to the same periods last year.
Net Earnings
13 Weeks Ended | 39 Weeks Ended | |||||||||||||||||||||||||||||
($ In thousands) | October 31, 2015 | November 1, 2014 | $ Change | % Change | October 31, 2015 | November 1, 2014 | $ Change | % Change | ||||||||||||||||||||||
Net earnings | $ | 5,322 | $ | 5,338 | $ | (16 | ) | (0.3 | )% | $ | 17,254 | $ | 16,091 | $ | 1,163 | 7.2 | % | |||||||||||||
Net earnings remained relatively consistent for the thirteen weeks ended October 31, 2015, compared to the same period last year.
Net earnings increased by $1.2 million for the thirty-nine weeks ended October 31, 2015, compared to the same period last year. The increase was primarily due to a decrease in Other operating expenses, net, partially offset by a decrease in Total revenues.
Liquidity and Capital Resources
Overview
As of October 31, 2015, 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.
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
10
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 October 31, 2015.
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 at least the next twelve months.
Cash Flows
39 Weeks Ended | ||||||||||||
(In thousands) | October 31, 2015 | November 1, 2014 | Change | |||||||||
Net cash provided by operating activities | $ | 42,687 | $ | 37,623 | $ | 5,064 | ||||||
Net cash provided by investing activities | 592 | 1,355 | (763 | ) | ||||||||
Net cash used in financing activities | (11,389 | ) | (9,634 | ) | (1,755 | ) | ||||||
Net increase during period in cash and cash equivalents | $ | 31,890 | $ | 29,344 | $ | 2,546 | ||||||
Cash Flows Provided by Operating Activities
During the thirty-nine weeks ended October 31, 2015, Net cash provided by operating activities was $42.7 million, compared to $37.6 million for the thirty-nine weeks ended November 1, 2014. The increase in Net cash provided by operating activities was primarily due to an increase in collections of base rents as a result of a base rent escalation as set forth under the terms of the TRU Propco II Master Lease. Partially offsetting the increase was a decrease in termination payments received from Toys-Delaware.
Cash Flows Provided by Investing Activities
During the thirty-nine weeks ended October 31, 2015, Net cash provided by investing activities was $0.6 million, compared to $1.4 million for the thirty-nine weeks ended November 1, 2014. The decrease in Net cash provided by investing activities was due to a decrease in proceeds received from the sale of real estate.
Cash Flows Used in Financing Activities
During the thirty-nine weeks ended October 31, 2015, Net cash used in financing activities was $11.4 million, compared to $9.6 million for the thirty-nine weeks ended November 1, 2014. The increase in Net cash used in financing activities was due to an increase in Distributions.
Debt
Refer to the Annual Report on Form 10-K 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 January 31, 2015 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 January 31, 2015, for a discussion of critical accounting policies.
11
Recently Adopted Accounting Pronouncements
In May 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-08, “'Business Combinations (Topic 805): Pushdown Accounting - Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115” (“ASU 2015-08”). The amendments in ASU 2015-08 amend various SEC paragraphs included in the FASB’s Accounting Standards Codification to reflect the issuance of Staff Accounting Bulletin No. 115 (“SAB 115”). SAB 115 rescinds portions of the interpretive guidance included in the SEC’s Staff Accounting Bulletins series and brings existing guidance into conformity with ASU No. 2014-17, “Business Combinations (Topic 805): Pushdown Accounting,” which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The Company has adopted the amendments in ASU 2015-08, effective May 8, 2015, as the amendments in the update are effective upon issuance. The adoption did not have an impact on our Condensed Financial Statements.
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” or the negative version of these words or other 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, including rental income, 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, birth rates, Toys-Delaware’s ability to implement its strategy including implementing initiatives for season, Toys-Delaware’s ability to recognize cost savings, implementation and operation of Toys-Delaware’s new eCommerce platform, marketing strategies, the availability of adequate financing to us, Toys-Delaware and TRU, Toys-Delaware’s access to trade credit, changes in consumer preferences, changes in employment legislation, 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 April 24, 2015, and in our other 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 October 31, 2015. 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 January 31, 2015.
12
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.
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 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
13
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 January 31, 2015.
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.
14
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 15, 2015 | /s/ Michael J. Short | |
Michael J. Short | ||
President and Chief Financial Officer | ||
15
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 October 31, 2015 (filed as Exhibit 99.1 to the Form 8-K filed by Toys “R” Us, Inc. on December 15, 2015 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 | |
16