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TOYS R US PROPERTY CO II, LLC filed this Form 10-K on 05/03/2013
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TRU Propco II 2012 10K

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
 
 
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended February 2, 2013 Commission file number 333-168515
 
Toys “R” Us Property Company II, LLC
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
37-1512919
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
 
 
One Geoffrey Way
Wayne, New Jersey
 
07470
(Address of principal executive offices)
 
(Zip code)
(973) 617-3500
(Registrant’s telephone number, including area code)
______________________________________ 
Securities registered pursuant to Section 12(b) or 12(g) of the Act:
None
______________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes x    No ¨
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  ¨
(Note: As a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if the registrant were subject to such filing requirements.)
Indicate by check mark whether the registrants have submitted electronically and posted on their 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 registrants were required to submit and post such files).    Yes x  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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 May 3, 2013, all of our outstanding membership interests were privately held by our sole member, Giraffe Junior Holdings, LLC.
Toys “R” Us Property Company II, LLC meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
 




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




INDEX
 
 
 
 
 
 
Page
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
 
 
 
Item 15.
 
 
 
 
 
 



PART I
ITEM 1.
BUSINESS
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. Our fiscal year ends on the Saturday nearest to January 31 of each calendar year. This Annual Report on Form 10-K focuses on our last three fiscal years ended as follows: fiscal 2012 ended February 2, 2013; fiscal 2011 ended January 28, 2012; and fiscal 2010 ended January 29, 2011. With the exception of fiscal 2012, which includes 53 weeks, all other fiscal years presented are based on 52 week periods. References to fiscals 2012, 2011 and 2010 are to our fiscal years unless otherwise specified.
Our Business
We are a special purpose entity owned indirectly by TRU, through Toys-Delaware, and formed in July 2005. We own fee and ground leasehold interests in 129 properties in various retail markets throughout the United States (collectively, the “Properties” and each, a “Property”). We lease these Properties on a triple-net basis under a master lease 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 the financial statements for fiscal year ended February 2, 2013 and other information about our master tenant, Toys-Delaware (“Master Tenant”), see Exhibit 99.1 to this report.
TRU, through its subsidiary Toys-Delaware, also operates other properties in which the fee and leasehold interests in such properties are owned by the following affiliated entities: MAP 2005 Real Estate, LLC, Toys “R” Us Property Company I, LLC (“Propco I”) and Toys-Delaware. TRU used various criteria to allocate its retail stores to us and our counterparts. Historically, TRU acquired and built stores at various subsidiaries of TRU based primarily on local tax considerations. In 2005, TRU allocated certain properties to various subsidiaries, including entities that would eventually become Propco I and the Company. In 2009, TRU reorganized certain of these entities, including MPO Properties, LLC (“MPO Properties”), a wholly-owned indirect subsidiary of TRU that was merged into TRU on November 20, 2009, for the business purpose of facilitating the 2009 financings obtained at that time. As a result of the reorganization on November 20, 2009, we received from Toys-Delaware and other affiliates, including MPO Properties, 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 historical costs.
As of February 2, 2013, we owned fee and ground leasehold interests in 129 properties domestically, which include the following:
71 traditional toy stores, which typically range in size from 20,000 to 50,000 square feet and devote approximately 6,000 square feet to boutique areas for juvenile (including baby) products (Babies “R” Us Express and Juvenile Expansion formats devote approximately an additional 4,000 square feet and 1,000 square feet, respectively, for juvenile - including baby - products);
35 juvenile stores, which typically range in size from 30,000 to 45,000 square feet and devote approximately 2,000 to 3,000 square feet to traditional toy products; and
23 side-by-side stores, which typically range in size from 30,000 to 70,000 square feet and devote approximately 20,000 to 40,000 square feet to traditional toy products and approximately 10,000 to 30,000 square feet to juvenile (including baby) products.
The Properties are important to the operations of Toys-Delaware, generating $1.1 billion of U.S. store revenues, which represented approximately 14% of Toys-Delaware’s total U.S. store revenues for the fiscal year ended February 2, 2013. In the opinion of management, the Properties are adequately covered by insurance. Certain of the Properties are subject to customary encumbrances, such as ground leases, rights of first offer or refusal, third-party purchase rights, continuous-operations covenants and use restrictions.
The TRU Propco II Master Lease covers all of the Properties and is a triple-net lease requiring Toys-Delaware to pay all costs and expenses arising in connection with the ownership, operating, leasing, use, maintenance and repair of the Properties, including real estate taxes and assessments, utility charges, license and permit fees and insurance premiums, among other things. The TRU Propco II Master Lease requires the payment of a fixed rent which will increase by 10% every five years during its 20-year term. The TRU Propco II Master Lease provides that it is a single and indivisible lease of all the Properties.

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Geographic Distribution of Properties
The following table sets forth the locations of the Properties as of February 2, 2013:
Location
  
Number of
Properties
Alabama
  
2
Arizona
  
3
California
  
10
Colorado
  
2
Connecticut
  
3
Florida
  
3
Illinois
  
7
Indiana
  
3
Iowa
  
2
Kentucky
  
1
Louisiana
  
1
Maryland
  
3
Massachusetts
  
7
Michigan
  
7
Missouri
  
1
Nevada
  
2
New Hampshire
  
2
New Jersey
  
1
New York
  
4
North Carolina
  
2
Ohio
  
21
Oregon
  
2
Pennsylvania
  
18
South Carolina
  
2
Tennessee
  
4
Texas
  
6
Utah
  
1
Virginia
  
4
Wisconsin
  
5
Total
  
129
The TRU Propco II Master Lease
The net base cash rents to be paid by the Master Tenant to us under the TRU Propco II Master Lease, effective November 20, 2009, increased to approximately $91 million per annum, net of rents due to third parties, subject to 10% increases on February 1, 2015, February 1, 2020 and February 1, 2025. For a more detailed description of the TRU Propco II Master Lease, see Note 3 to the Financial Statements entitled “LEASES” and Item 13 entitled “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE” of this Annual Report on Form 10-K.
Leases with Third Parties — Company as Lessee
All of our leases with third parties where we are the lessee include options that allow us to renew or extend the lease term beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease. Such terms and conditions include the rental rates agreed upon at the inception of the lease that could represent below or above market rental rates later in the life of the lease, depending upon market conditions at the time of such renewal or extension and the term of the TRU Propco II Master Lease. In addition, many leases include early termination options, which can be exercised by us under specified conditions, including, upon damage, destruction or condemnation of a specified percentage of the value or land area of the property.

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Formation Documents
We are a Delaware limited liability company with no subsidiaries. We own no material assets other than the Properties and related assets. Our sole equity member is Giraffe Junior Holdings, LLC.
We were organized solely to acquire, own, hold, sell, assign, transfer, operate, lease and otherwise deal with real estate properties, and to exercise all powers enumerated in the Delaware Limited Liability Company Act relating thereto. We are not permitted to own any asset or property other than our interest in the Properties or other real property and incidental personal property or such subsidiaries that own such interests. Further, subject to certain exceptions, we must maintain an arm’s length relationship with any affiliate, and not enter into or be a party to any transaction other than arm’s length transactions. In addition, our organizational documents place certain restrictions on our ability to institute bankruptcy proceedings, liquidate, dissolve, consolidate or merge. No assurance can be given that we will not file for bankruptcy protection or that our creditors will not initiate a bankruptcy or similar proceeding against us. See Item 1A entitled “RISK FACTORS” of this Annual Report on Form 10-K for further details.
Employees
As of February 2, 2013, we employed no individuals. Pursuant to the domestic services agreement and the TRU Propco II Master Lease, Toys-Delaware provides us with services to operate our Properties, including paying all costs and expenses arising in connection with the ownership, operation, lease, use, maintenance and repair of the Properties.
Our executive officers, together with Toys-Delaware pursuant to a domestic services agreement, manage our day-to-day operations. Our day-to-day operations consist primarily of receipt of rent from Toys-Delaware, pursuant to the TRU Propco II Master Lease, and payment of interest to the note holders pursuant to the terms of the 8.500% senior secured notes due fiscal 2017 (the “Secured Notes”).
Certain members of Toys-Delaware’s management were involved in the negotiation of the TRU Propco II Master Lease on our behalf. Future amendments to the TRU Propco II Master Lease may be negotiated on our behalf by certain officers of Toys-Delaware who might perform similar functions on behalf of Toys-Delaware. In addition, certain officers of Toys-Delaware, some of whom might perform similar functions on behalf of Toys-Delaware, may have responsibility for determining whether Toys-Delaware is in compliance with the TRU Propco II Master Lease. Although certain conflicts of interest may arise, such as whether to require compliance with certain covenants under the TRU Propco II Master Lease, we believe that in light of the importance of the Properties to both us and Toys-Delaware and the mutuality of interest in preserving the value of the Properties, conflicts will be resolved in a manner consistent with an arm’s length transaction. In addition, the officers involved are fully aware of, and intend to fully comply with, our contractual obligations; which require, among other things, that we and the Master Tenant deal with one another on an arm’s length basis.
There are certain members of Toys-Delaware management that are also involved in our management, and we, Toys-Delaware and our management teams are fully aware of our and their respective obligations under the TRU Propco II Master Lease and intend to comply with our and their respective contractual obligations. In the event of certain payment defaults by Toys-Delaware under the TRU Propco II Master Lease, the holders of the Secured Notes would have the right to accelerate the debt. As a result, in case a conflict of interest were to arise, we and Toys-Delaware would have a common interest to resolve the conflict to avoid the acceleration of the debt.
Mortgage Limitations
We have not adopted formal policies with respect to investing in real estate or interests in real estate. While we have not adopted a formal policy in this regard, in the event that we elect to lease or purchase additional properties, our current preference would be to lease such property. We currently have no intent to transfer properties or acquire additional properties although we may be required to sell properties in certain circumstances. We have not adopted an internal policy on the number or amount of mortgages, if any, which may be placed on any one piece of property; however, limitations contained in our indenture or the credit facilities or indentures to which TRU is a party may restrict our ability to mortgage our property.
ITEM 1A.
RISK FACTORS
Investors should carefully consider the risks described below together with all of the other information in this Annual Report on Form 10-K. The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be less significant than the following risk factors, may also adversely affect our business and operations. If any of the following risks actually occur, our business, financial condition, cash flows or results of operations could be materially adversely affected.

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Risks Relating to the Company
Our only assets, and sole source of revenue, are our Properties and the TRU Propco II Master Lease. Additionally, the Properties and the TRU Propco II Master Lease provide the sole source of cash to make payments on the Secured Notes.
Our only assets are our Properties. We have no operations and generate all of our revenues from payments made by Toys-Delaware pursuant to the terms of the TRU Propco II Master Lease. As discussed in more detail below under “— Risks Related to the Master Tenant’s and TRU’s Substantial Indebtedness,” Toys-Delaware is highly leveraged and will be required to devote a substantial portion of its cash flow to service its own debt. Absent continued payments from Toys-Delaware under the TRU Propco II Master Lease, we will rely solely on cash on hand and additional borrowings to make payments on the Secured Notes.
Although this Form 10-K contains certain financial and operating information with respect to Toys-Delaware and TRU, neither of these entities nor any of their respective subsidiaries (other than us) is an obligor on, or a guarantor of, the Secured Notes. As a result, holders of the Secured Notes do not have a direct claim against any of these entities or their assets.
All of our revenues are generated under the TRU Propco II Master Lease. Unexpected expenses, termination of the TRU Propco II Master Lease, sales of Properties under the TRU Propco II Master Lease or a bankruptcy of the Master Tenant could have a material impact on our financial condition.
The TRU Propco II Master Lease provides the only source of our revenue. While the TRU Propco II Master Lease is a triple-net lease whereby Toys-Delaware, as tenant, is obligated to pay most operating costs with respect to the Properties, if we have unexpected expenses not covered by the TRU Propco II Master Lease, our net cash flow could be adversely affected. Toys-Delaware’s failure to make payments under the TRU Propco II Master Lease would have a material adverse effect on our financial condition.
In addition to the risk that Toys-Delaware might fail to make payments under the TRU Propco II Master Lease, Toys-Delaware may fail to perform other obligations under the TRU Propco II Master Lease, including the obligations to pay real estate taxes on the Properties and the rent owed under any underlying ground leases, insure the Properties, maintain the Properties in good repair and condition and in compliance with laws, remediate any environmental problems at the Properties and restore any Property following a casualty or condemnation. The failure of Toys-Delaware to perform these obligations may have a material adverse effect on the value of the Properties and our financial condition.
Pursuant to the TRU Propco II Master Lease, Toys-Delaware has the option to declare properties “uneconomic” and request the removal of such properties from the TRU Propco II Master Lease. Upon such a request from Toys-Delaware, we must use reasonable good faith efforts to sell such properties, free and clear of the liens in favor of the collateral agent. The sale of a substantial number of properties under the TRU Propco II Master Lease could have a material adverse effect on our cash flows. For a more detailed description of the TRU Propco II Master Lease, see Note 3 to the Financial Statements entitled “LEASES” and Item 13 entitled “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE” of this Annual Report on Form 10-K.
Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control.
Certain events may decrease cash available for payments on the Secured Notes, as well as the value of the Properties. These events include, but are not limited to:
adverse changes in national or local economic and demographic conditions;
adverse changes in the financial condition of the Master Tenant;
inability to collect rent from the Master Tenant;
reductions in the level of demand for commercial space and changes in the relative popularity of properties;
increases in the supply of or demand for commercial space in a particular area;
fluctuations in interest rates, which could adversely affect our ability, or the ability of buyers and tenants of properties, to obtain financing on favorable terms or at all;
changes in, and changes in enforcement of, laws, regulations and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies and the Americans with Disabilities Act of 1990;
property and casualty losses, some of which may be uninsured;
liens, encumbrances, zoning matters or other matters affecting title to or use of real estate;

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asbestos/lead related liabilities and costs of containment or removal and other environmental hazards at the Properties for which we may be liable, including those created by prior owners or occupants, existing tenants, adjacent land or other parties; and
terrorist attacks which, among other things, could lead to damage to one or more of the Properties, result in higher costs for insurance premiums or diminished availability of insurance coverage for losses related to terrorist attacks.
In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in market rents or property values. If we cannot operate the Properties to meet our financial expectations, our financial condition, results of operations, cash flow and ability to satisfy our debt service obligations could be adversely affected.
We lease, rather than own, a portion of the Properties and the leasing of such Properties exposes us to possible liabilities and losses.
Of our 129 Properties, 13 are leased from third parties where we have a leasehold interest via a ground lease. Substantially all of these leases include options that allow us to renew or extend the lease term beyond the initial lease period at rental rates agreed upon at the inception of the lease that could represent below or above market rental rates later in the life of the lease. As a result, we may be committed to pay rents at above market rental rates for certain of the Properties now and in the future.
In addition, because we lease these Properties, we will have no economic interest in the land or building at the expiration of the ground lease if not renewed or if such ground lease is terminated due to a breach by us. As a result, although we will share in the income stream derived from the lease, we will not share in any increase in the residual value of the land associated with the underlying Property. Further, because we do not completely control the underlying land, the third party owners that lease this land to us could take certain actions to disrupt our rights in the Properties or Toys-Delaware’s operation of such Properties.
Several of the Properties are subject to rights of first refusal or other third party purchase rights, which may adversely affect the ability of the collateral agent to foreclose on such Properties.
Several of the Properties are subject to agreements that provide third parties with rights of first refusal, purchase options or other rights to purchase such Properties. These rights are most commonly triggered upon the occurrence of a store closing or the sale or lease of the Property to a non-affiliate. The rights of first refusal that apply to several of the Properties may be triggered by a sale resulting from a foreclosure, deed in lieu of foreclosure or other similar remedy of the collateral agent relating to the Property. In the event that any such right of first refusal or other repurchase right is interpreted as being exercisable upon a foreclosure, deed in lieu of foreclosure or other similar remedy of the collateral agent, or a sale following a foreclosure on the Property, the ability of the collateral agent to realize or foreclose on such Property may be adversely affected.
The Properties are concentrated in certain states and a downturn in such states could have an adverse effect on us.
Toys-Delaware’s ability to make payments under the TRU Propco II Master Lease and the market value of the Properties could be adversely affected by economic conditions generally or in states where the Properties are located, conditions in the real estate markets where the Properties are located, changes in governmental rules and fiscal policies, acts of nature, including earthquakes, floods and hurricanes (which may result in uninsured losses), and other factors which are beyond our control. The Properties are located in 29 states. The economy of any state in which a Property is located may be adversely affected to a greater degree than that of other areas of the country by certain developments affecting industries concentrated in such state or region. Moreover, in recent periods, several regions have experienced significant downturns in the market value of real estate. Significant percentages of the Properties are located in Ohio (21 Properties, or approximately 16% of the Properties); Pennsylvania (18 Properties, or approximately 14% of the Properties); California (10 Properties, or approximately 8% of the Properties); and Illinois, Massachusetts and Michigan (7 Properties in each of these states, or approximately 5% of the Properties).
Insurance for the Properties may be inadequate to cover future losses.
The Properties are covered by insurance policies that also cover other TRU real estate, subject to self insurance retentions. These policies include property insurance with a per occurrence coverage limit of $600 million (which is less than the aggregate principal amount of the outstanding Secured Notes). In the event that such policies are drawn on to cover losses on real estate other than the Properties, the amount of insurance coverage available under such policies would thereby be reduced and could be insufficient to cover the Properties’ insurable risks.
Additionally, there is a possibility of catastrophic loss with respect to each Property for which insurance proceeds may not be adequate (such as floods) or which may result from risks not covered by insurance. Also, certain of the Properties are located in states that have been historically at greater risk to acts of nature (such as earthquakes, hurricanes and floods). As with all

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real estate, if reconstruction (for example, following fire or other casualty) or any major repair or improvement is required to a Property, changes in laws and governmental regulations may be applicable and may materially affect the cost to us or our ability to effect such reconstruction, major repair or improvement.
There can be no assurance that the amount of earthquake or flood or property insurance currently required or provided would be sufficient to cover damages caused by an earthquake or flood or other hazard, or that such insurance will be commercially available in the future.
Pursuant to the TRU Propco II Master Lease, we are entirely reliant on Toys-Delaware for providing and maintaining insurance. In addition to the risk that Toys-Delaware may fail to perform these obligations, the risks outlined above are also applicable to the insurance provided and maintained by Toys-Delaware.
We may be exposed to material environmental liabilities.
While we have established procedures to reduce the likelihood of incurring liabilities under applicable federal, state and local environmental laws, there may be material environmental liabilities of which we are unaware.
In addition, no assurances can be given that future laws, ordinances or regulations will not impose any material environmental liability on us or that the current environmental condition of our owned or leased Properties will not be adversely affected by conditions at locations in the vicinity of the Properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
We are entirely reliant on Toys-Delaware pursuant to the TRU Propco II Master Lease for our compliance with environmental laws. In addition to the risk that Toys-Delaware may fail to effect such compliance, the risks outlined above in this section are also applicable to such compliance by Toys-Delaware.
We, Toys-Delaware or TRU may become subject to bankruptcy proceedings and in that event our respective rights and obligations may be subject to material modification.
We were formed with the intent that we are a bankruptcy remote entity so as to reduce the likelihood of a bankruptcy of us. Although such measures reduce the likelihood that we would incur obligations that would result in a bankruptcy, no assurance can be given that we will not file for bankruptcy protection (including in connection with the commencement of any bankruptcy proceedings of another TRU entity, or otherwise) or that our creditors will not initiate a bankruptcy or similar proceeding against us. Because we are the owner or ground lessee of the Properties, the possibility that we could become such a debtor is likely greater, from a theoretical standpoint, than with respect to an entity that merely owns financial assets, because, among other reasons, claims may arise against us from our ownership or operation of the Properties.
Delay in Payments. In the event that we were to become a debtor in a case (a “Bankruptcy Case”) seeking reorganization or other relief under Title 11 of the United States Code (the “Bankruptcy Code”), a delay and/or substantial reduction in payments under the Secured Notes may occur.
Rejection of TRU Propco II Master Lease. If Toys-Delaware were to become a debtor in a Bankruptcy Case, a trustee in bankruptcy for Toys-Delaware (or Toys-Delaware as debtor-in-possession) would have the right, under the Bankruptcy Code, to reject or assume the TRU Propco II Master Lease. If the TRU Propco II Master Lease were so rejected, Toys-Delaware would be required to surrender the Properties to us and we would have a general unsecured claim against Toys-Delaware limited to the lesser of (a) our actual damages (if any) as determined under applicable state law and (b) the rent required by the TRU Propco II Master Lease, without acceleration, for the greater of one year, or 15%, not to exceed three years, of the remaining term of the TRU Propco II Master Lease. It is impossible to predict how such a claim would be treated in any Toys-Delaware Bankruptcy Case or when any distributions would be made thereon.
Recharacterization of TRU Propco II Master Lease as financing. The foregoing assumes that the TRU Propco II Master Lease would be treated in bankruptcy as a lease, and not as a financing. While the matter is not free from doubt, we believe that if the issue was properly presented to a court and the court interpreted the relevant law on a basis consistent with the existing legal precedents, the court would hold that the TRU Propco II Master Lease constitutes a true lease. If the TRU Propco II Master Lease were treated as a financing by a bankruptcy court, however, we and Toys-Delaware would have the rights and obligations of, respectively, a creditor and debtor, rather than a landlord and tenant. It is difficult to predict fully the consequences that would result from this recharacterization, but they would include the potential of a non-consensual restructuring of Toys-Delaware’s obligations to us (a “cram-down”); the potential disallowance of the mortgage liens as having been granted by a party other than the equitable owners of the Properties; the absence of any requirement on the part of Toys-Delaware to accept or reject the TRU Propco II Master Lease and therefore to surrender the Properties in the event of a rejection; the elimination of Toys-Delaware’s obligation to either (i) pay, during the bankruptcy proceeding and prior to a TRU Propco II Master Lease rejection, as an administrative expense, the rents payable under the TRU Propco II Master Lease; or (ii) cure any outstanding

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monetary defaults prior to any assumption of the TRU Propco II Master Lease and the obligation to repay to Toys-Delaware for the benefit of its estate in bankruptcy payments made to us by Toys-Delaware under the TRU Propco II Master Lease during the one-year preference period prior to the commencement of the Bankruptcy Case.
Pari Passu treatment of claims. Regardless whether the TRU Propco II Master Lease were characterized as a true lease or as a financing by a bankruptcy court, any claim for damages against Toys-Delaware under the TRU Propco II Master Lease by us (to the extent allowed as discussed above) would be payable only out of the assets of Toys-Delaware available for such payment. Any such claim would rank pari passu with all unsecured general obligations of Toys-Delaware.
Severability of TRU Propco II Master Lease. Although the TRU Propco II Master Lease expresses the intention of the parties thereto that the TRU Propco II Master Lease constitutes a single, integrated lease for all of the Properties, there can be no assurance that a bankruptcy court would not permit a trustee in bankruptcy for Toys-Delaware (or Toys-Delaware as debtor-in-possession) to assume the TRU Propco II Master Lease only with respect to certain Properties and reject the TRU Propco II Master Lease with respect to other Properties. In that case, we would be entitled to lease rejection damages (limited as described above) but not rent and other rights to payment under the TRU Propco II Master Lease with respect to those Properties for which the TRU Propco II Master Lease was rejected and the surrender of only such Properties. Toys-Delaware would be entitled to remain in possession of those Properties for which the TRU Propco II Master Lease was assumed, or might be authorized to assign the TRU Propco II Master Lease with respect to some or all of those Properties to one or more other parties who will assume the TRU Propco II Master Lease with respect to those Properties, provided that all existing defaults under the TRU Propco II Master Lease with respect to such Properties are cured and we are provided with “adequate assurance” (as determined by the bankruptcy court) of future performance by the tenant of its obligations under the TRU Propco II Master Lease with respect to such Properties. In addition, we may determine that agreeing to a modification of the TRU Propco II Master Lease in a Toys-Delaware bankruptcy proceeding would be better for us than a rejection of the TRU Propco II Master Lease in its entirety by Toys-Delaware followed by a liquidation of Toys-Delaware.
No covenant to operate. Toys-Delaware is not required under the TRU Propco II Master Lease to operate any of the Properties as Toys “R” Us or Babies “R” Us stores and is permitted to sublease Properties. As a consequence, Properties in which Toys-Delaware is not operating may be maintained to a lesser standard than those in which it is operating, and, in the event of a Bankruptcy Case involving Toys-Delaware, Toys-Delaware may be more inclined to reject the TRU Propco II Master Lease with respect to such Properties, assuming the TRU Propco II Master Lease is not held to be indivisible, or reject the TRU Propco II Master Lease in its entirety assuming the TRU Propco II Master Lease is held to be indivisible, if the number of such Properties is substantial.
Ineffectiveness of bankruptcy-remoteness; consolidation with TRU or Toys-Delaware; fraudulent conveyance. We have taken steps that are intended to ensure that the voluntary or involuntary application for relief by TRU or Toys-Delaware under the Bankruptcy Code will not result in the consolidation of our assets and liabilities with those of TRU or Toys-Delaware or their subsidiaries (other than us). These steps include the maintenance of our own books and records and the requirement that all transactions between us, on the one hand, and TRU or Toys-Delaware, on the other hand, and our respective affiliates will be on an arm’s-length basis. In the event, however, that we, Toys-Delaware or TRU were to become a debtor in a Bankruptcy Case, a creditor, receiver, conservator or the trustee in a bankruptcy of the debtor might request a court to order our assets and liabilities be consolidated with our, Toys-Delaware’s or TRU’s assets (including its properties), as the case may be, for the satisfaction of claims of creditors of the debtor. If our assets and liabilities were consolidated with Toys-Delaware, the TRU Propco II Master Lease would be eliminated. Alternatively, any such party may seek to void any part of the 2005 financing transactions as a fraudulent transfer. In addition, any claim described herein against the bankruptcy estate of us, Toys-Delaware or TRU would be an unsecured claim against such bankruptcy estate and, as such, full recovery may be unlikely and the extent to which such claim would be paid, and the form and timing of such payment, is uncertain. As a result, under such circumstances, the amount and timing of distributions on the Secured Notes would be adversely affected.
We have two independent members whose approval is required as a condition to our commencement of a Bankruptcy Case with respect to ourselves. That requirement will not prevent the commencement of such a Bankruptcy Case (including, in connection with the commencement of any Bankruptcy Case of another TRU entity, or otherwise).
Risks Relating to the Master Tenant’s Business
Toys-Delaware’s business is highly seasonal, and its financial performance depends on the results of the fourth quarter of each fiscal year and, as a result, its operating results could be materially adversely affected if it achieves less than satisfactory sales prior to or during the holiday season.
Toys-Delaware’s business is highly seasonal. During fiscals 2012, 2011 and 2010 approximately 43%, respectively, of Toys-Delaware’s Total revenues were generated in the fourth quarter. Toys-Delaware typically incurs net losses in each of the first three quarters of the year, with a substantial portion of its earnings generated in the fourth quarter. As a result, Toys-Delaware

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depends significantly upon the fourth quarter holiday selling season. If Toys-Delaware achieves less than satisfactory sales, operating earnings or cash flows from operating activities during the fourth quarter, it may not be able to compensate sufficiently for the lower sales, operating earnings or cash flows from operating activities during the first three quarters of the fiscal year. Its results in any given period may be affected by dates on which important holidays fall and the shopping patterns relating to those holidays. Additionally, the concentrated nature of Toys-Delaware’s seasonal sales means that its operating results could be materially adversely affected by natural disasters and labor strikes, work stoppages, terrorist acts or disruptive global political events prior to or during the holiday season, as described below.
Toys-Delaware’s industry is highly competitive and competitive conditions may adversely affect its revenues and overall profitability.
The retail industry is highly and increasingly competitive and Toys-Delaware’s results of operations are sensitive to, and may be adversely affected by competitive pricing, promotional pressures, competitor credit programs, additional competitor store openings and other factors. As a specialty retailer that primarily focuses on toys and juvenile products, Toys-Delaware competes with discount and mass merchandisers, such as Wal-Mart and Target, national and regional chains and department stores, as well as local retailers in the markets Toys-Delaware serves. Toys-Delaware also competes with national and local discount stores, consumer electronics retailers, supermarkets and warehouse clubs, as well as Internet and catalog businesses. Toys-Delaware may be vulnerable to the special competitive pressures from the growing e-commerce activity in the market, both as they may impact its own e-commerce business, and as they may impact the operating results and investment values of its existing physical stores. Competition is principally based on product variety, price, quality, availability, advertising and promotion, convenience or store location, safety and customer support and service. Toys-Delaware believes that some of its competitors in the toy market and juvenile products market, as well as in the other markets in which it competes, have a larger market share than its market share. In addition, some of its competitors have greater financial resources, lower merchandise acquisition costs and lower operating expenses than Toys-Delaware does.
Much of the merchandise Toys-Delaware sells is also available from various retailers at competitive prices. Discount and mass merchandisers use aggressive pricing policies and enlarged toy-selling areas during the holiday season to increase sales and build traffic for other store departments. Toys-Delaware’s business is vulnerable to shifts in demand and pricing, as well as consumer preferences. Competition in the video game market has increased in recent years as mass merchandisers have expanded their offerings in this market, and as alternative sales and distribution channels (such as Internet retailers and electronic distribution of software) have grown in importance.
The baby registry market is highly competitive, based on convenience, quality and selection of merchandise offerings and functionality. Toys-Delaware’s baby registry primarily competes with the baby registries of mass merchandisers and other specialty format and regional retailers. Some of Toys-Delaware’s competitors have been aggressively advertising and marketing their baby registries through national television and magazine campaigns. These trends present consumers with more choices for their baby registry needs, and as a result, increase competition for Toys-Delaware’s baby registry.
If Toys-Delaware fails to compete successfully, Toys-Delaware could face lower sales and may decide or be compelled to offer greater discounts to its customers, which could result in decreased profitability.
Toys-Delaware’s sales may be adversely affected by changes in economic factors and changes in consumer spending patterns.
Many economic and other factors outside Toys-Delaware’s control, including consumer confidence, consumer spending levels, employment levels, consumer debt levels, inflation and deflation, as well as the availability of consumer credit, affect consumer spending habits. A significant deterioration in the global financial markets and economic environment, recessions or an uncertain economic outlook adversely affects consumer spending habits and results in lower levels of economic activity. The domestic and international political situation, including the economic health of various political jurisdictions, also affects economic conditions and consumer confidence. In addition, changing economic and regulatory conditions and increasing consumer credit delinquencies may cause banks to re-evaluate their lending practices and terms which could have an adverse effect on Toys-Delaware’s credit card program and consequently, an adverse effect on its sales. Any of these events and factors could cause consumers to curtail spending and could have a negative impact on Toys-Delaware’s financial performance and position in future fiscal periods.
Toys-Delaware’s operations have significant liquidity and capital requirements and depend on the availability of adequate financing on reasonable terms. If its lenders are unable to fund borrowings under their credit commitments or Toys-Delaware is unable to borrow, it could have a significant negative effect on its business.
Toys-Delaware has significant liquidity and capital requirements. Among other things, the seasonality of Toys-Delaware’s businesses requires it to purchase merchandise well in advance of the fourth quarter holiday selling season. Toys-Delaware depends on its ability to generate cash flow from operating activities, as well as on borrowings under its revolving credit facility, to finance the carrying costs of this inventory and to pay for capital expenditures and operating expenses. As of

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February 2, 2013, Toys-Delaware had no outstanding borrowings under its $1.85 billion secured revolving credit facility (“ABL Facility”). For fiscal 2012 and fiscal 2011, peak borrowings under the ABL Facility were $220 million and $815 million, respectively, as Toys-Delaware purchased merchandise for the fourth quarter holiday selling season. If its lenders are unable to fund borrowings under its credit commitments or Toys-Delaware is unable to borrow, it could have a significant negative effect on its business. In addition, any adverse change to its credit ratings or business could negatively impact its ability to refinance its debt on satisfactory terms and could have the effect of increasing its financing costs. While Toys-Delaware believes it currently has adequate sources of funds to provide for its ongoing operations and capital requirements for at least the next 12 months, any inability on Toys-Delaware’s part to have future access to financing, when needed, would have a negative effect on its business.
A loss of, or reduction in, trade credit from Toys-Delaware’s vendors could reduce its liquidity, increase its working capital needs and/or limit its ability to purchase products.
Trade credit from Toys-Delaware’s vendors is an important source of financing for the purchase of the inventory Toys-Delaware sells in its stores. Accordingly, the loss of, or reduction in, trade credit could have a significant adverse impact on Toys-Delaware’s inventory levels and operating cash flow and negatively impact its liquidity. Toys-Delaware’s vendors may seek credit insurance to protect against non-payment of amounts due to them. If credit insurance is not available to vendors at reasonable terms or at all, vendors may demand accelerated payment of amounts due to them or require advance payments or letters of credit before goods are shipped to Toys-Delaware. Any adverse changes in Toys-Delaware’s trade credit for these or other reasons could increase the costs to Toys-Delaware of financing its inventory or negatively impact its ability to deliver products to its customers, which could in turn negatively affect Toys-Delaware’s financial performance.
Toys-Delaware may not retain or attract customers if Toys-Delaware fails to successfully implement its strategic initiatives, which could result in lower sales and a failure to realize the benefit of the expenditures incurred for these initiatives.
Toys-Delaware continues to implement a series of customer-oriented strategic programs designed to differentiate and strengthen its core merchandise content and service levels and to expand and enhance its merchandise offerings. Toys-Delaware seeks to improve the effectiveness of its marketing and advertising programs for its “R” Us stores and e-commerce business. The success of these and other initiatives will depend on various factors, including the implementation of its growth strategy, the appeal of its store formats, its ability to offer new products to customers, its financial condition, its ability to respond to changing consumer preferences and competitive and economic conditions. Toys-Delaware continuously endeavors to minimize its operating expenses, without adversely affecting the profitability of the business. If it fails to implement successfully some or all of its strategic initiatives, it may be unable to retain or attract customers, which could result in lower sales and a failure to realize the benefit of the expenditures incurred for these initiatives.
If Toys-Delaware cannot implement its juvenile integration strategy or open new stores, its future growth will be adversely affected.
Toys-Delaware’s growth is dependent on both increases in sales in existing stores and the ability to successfully implement its juvenile integration strategy and open profitable new stores. Increases in sales in existing stores are dependent on factors such as competition, merchandise selection, store operations and other factors discussed in these Risk Factors. Toys-Delaware’s ability to successfully implement its juvenile integration strategy in a timely and cost effective manner or open new stores and expand into additional market areas depends in part on the following factors, which are in part beyond Toys-Delaware’s control:
the availability of sufficient funds for the expansion;
the availability of attractive store locations and the ability to accurately assess the demographic or retail environment and customer demand at a given location;
the ability to negotiate favorable lease terms and obtain the necessary permits and zoning approvals;
the absence of occupancy delays;
the ability to construct, furnish and supply a store in a timely and cost effective manner;
the ability to hire and train new personnel, especially store managers, in a cost effective manner;
costs of integration, which may be higher than anticipated; and
general economic conditions.
Delays or failures in successfully implementing its juvenile integration strategy and opening new stores, or achieving lower than expected sales in integrated or new stores, or drawing a greater than expected proportion of sales in integrated or new stores from existing stores, could materially adversely affect Toys-Delaware’s growth and/or profitability. In addition, Toys-

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Delaware may not be able to anticipate all of the challenges imposed by the expansion of its operations and, as a result, may not meet its targets for integrating, opening new stores or relocating stores or expanding profitably.
Some of Toys-Delaware’s new stores may be located in areas where it has little or no meaningful experience. Those markets may have different market conditions, consumer preferences and discretionary spending patterns than Toys-Delaware’s existing markets, which may cause its new stores to be less successful than stores in its existing markets. Other new stores may be located in areas where Toys-Delaware has existing stores. Although Toys-Delaware has experience in these markets, increasing the number of locations may result in unanticipated over-saturation of markets and temporarily or permanently divert customers and sales from its existing stores, thereby adversely affecting Toys-Delaware’s overall financial performance.
Toys-Delaware’s sales may be adversely affected if it fails to respond to changes in consumer preferences in a timely manner.
Toys-Delaware’s financial performance depends on its ability to identify, originate and define product trends, as well as to anticipate, gauge and react to changing consumer preferences in a timely manner. Its products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. Its business fluctuates according to changes in consumer preferences dictated in part by fashion trends, perceived value and season. These fluctuations affect the merchandise in stock since purchase orders are written well in advance of the holiday season and, at times, before fashion trends and high-demand brands are evidenced by consumer purchases. If it overestimates the market for its products, it may be faced with significant excess inventories, which could result in increased expenses and reduced margins associated with having to liquidate obsolete inventory at lower prices. Conversely, if it underestimates the market for its products, Toys-Delaware will miss opportunities for increased sales and profits, which would place it at a competitive disadvantage.
Sales of video games and video game systems tend to be cyclical, which may result in fluctuations in Toys-Delaware’s results of operations, and may be adversely affected if products are sold through alternative channels.
Sales of video games and video game systems, which have accounted for 7%, 8% and 9% of Toys-Delaware’s annual Total revenues for fiscals 2012, 2011 and 2010, respectively, have been impacted by a shift to sales in channels other than traditional retail stores, including direct online distribution to customers. Furthermore, sales are cyclical in nature in response to the introduction and maturation of new technology. Following the introduction of new video game systems, sales of these systems and related software and accessories generally increase due to initial demand, while sales of older systems and related products generally decrease. Moreover, competition within the video game market has increased in recent years and, due to the large size of this product category, fluctuations in this market could have a material adverse impact on Toys-Delaware’s sales and profits trends. Additionally, if video game system manufacturers fail to develop new hardware systems, or if new video game products continue to be sold in channels other than traditional retail stores, Toys-Delaware’s sales of video game products could continue to decline, which would negatively impact its financial performance.
The success and expansion of Toys-Delaware’s e-commerce business depends on its ability to provide quality service to its Internet customers and if it is not able to provide such services, Toys-Delaware’s future growth will be adversely affected.
Toys-Delaware’s Internet operations are subject to a number of risks and uncertainties which are in part beyond its control, including the following:
changes in consumer willingness to purchase goods via the Internet;
increases in software filters that may inhibit Toys-Delaware’s ability to market its products through e-mail messages to Toys-Delaware’s customers and increases in consumer privacy concerns relating to the Internet;
changes in technology;
changes in applicable federal and state regulation, such as the Federal Trade Commission Act, the Children’s Online Privacy Act, the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act and similar types of international laws;
breaches of Internet security;
failure of Toys-Delaware’s Internet service providers to perform their services properly and in a timely and efficient manner;
failures in Toys-Delaware’s Internet infrastructure or the failure of systems or third parties, such as telephone or electric power service, resulting in website downtime or other problems;
failure by Toys-Delaware to process on-line customer orders properly and on time, which may negatively impact future on-line and in-store purchases by such customers; and
failure by Toys-Delaware’s service provider to provide warehousing and fulfillment services, which may negatively impact future on-line and in store purchases by customers.

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If Toys-Delaware is not able to provide satisfactory service to its Internet customers, its future growth will be adversely affected. Further, Toys-Delaware may be vulnerable to the special competitive pressures from the growing e-commerce activity in its market, both as they may impact its own e-commerce business, and as they may impact the operating results and investment values of its existing physical stores.
Toys-Delaware depends on key vendors to supply the merchandise that it sells to its customers and its vendors’ failure to supply quality merchandise in a timely manner may damage its reputation and brands and harm its business.
Toys-Delaware’s performance depends, in part, on its ability to purchase its merchandise in sufficient quantities at competitive prices. Toys-Delaware purchases its merchandise from numerous international and domestic manufacturers and importers. Toys-Delaware has no contractual assurances of continued supply, pricing or access to new products, and any vendor could change the terms upon which they sell to it or discontinue selling to it at any time. Toys-Delaware may not be able to purchase desired merchandise in sufficient quantities on terms acceptable to it in the future. Better than expected sales demand may also lead to customer backorders and lower in-stock positions of its merchandise.
In fiscal 2012, Toys-Delaware had approximately 1,800 active vendor relationships through which it procures the merchandise that it offers to its customers. For fiscal 2012, Toys-Delaware’s top 20 vendors worldwide, based on its purchase volume in USD, represented approximately 45% of the total products it purchased. Toys-Delaware’s inability to purchase suitable merchandise on acceptable terms or the loss of one or more key vendors could have a negative effect on its business and operating results and could cause it to miss products that it felt were important to its assortment. Toys-Delaware may not be able to develop relationships with new vendors, and products from alternative sources, if any, may be of a lesser quality and/or more expensive than those from existing vendors.
In addition, Toys-Delaware’s vendors are subject to various risks, including raw material costs, inflation, labor disputes, union organizing activities, financial liquidity, product merchantability, inclement weather, natural disasters and general economic and political conditions that could limit its vendors’ ability to provide Toys-Delaware with quality merchandise on a timely basis and at prices and payment terms that are commercially acceptable. For these or other reasons, one or more of Toys-Delaware’s vendors might not adhere to its quality control standards, and Toys-Delaware might not identify the deficiency before merchandise ships to its stores or customers. In addition, Toys-Delaware’s vendors may have difficulty adjusting to Toys-Delaware’s changing demands and growing business. Toys-Delaware’s vendors’ failure to manufacture or import quality merchandise in a timely and effective manner could damage Toys-Delaware’s reputation and brands, and could lead to an increase in customer litigation against Toys-Delaware and an increase in Toys-Delaware’s routine and non-routine litigation costs. Further, any merchandise that does not meet Toys-Delaware’s quality standards could become subject to a recall, which could damage Toys-Delaware’s reputation and brands and harm Toys-Delaware’s business.
If Toys-Delaware’s vendors fail to provide promotional support consistent with past levels, Toys-Delaware’s sales, earnings and cash flow could be adversely affected.
Toys-Delaware’s vendors typically provide it with promotional support for the sale of their products in Toys-Delaware’s stores and on Toys-Delaware’s website. Toys-Delaware also receives allowances for volume-related purchases. As part of this support, Toys-Delaware receives allowances, payments and credits from the vendors which reduce its cost of goods sold, supports the promotion and merchandising of the products Toys-Delaware sells and drives sales at its stores and on its website. Toys-Delaware cannot provide assurance that vendors will continue to provide it with this support consistent with past levels. If Toys-Delaware’s vendors fail to do so, its sales, earnings and cash flow could be adversely affected.
The decrease of birth rates in countries where Toys-Delaware operates could negatively affect its business.
Most of Toys-Delaware’s end-customers are newborns and children and, as a result, its revenues are dependent on the birth rates in countries where it operates. In recent years, many countries have experienced a sharp drop in birth rates as their population ages and education and income levels increase. A continued and significant decline in the number of newborns and children in these countries could have a material adverse effect on Toys-Delaware’s operating results.
If current store locations become unattractive, and attractive new locations are not available for a reasonable price, Toys-Delaware’s ability to implement its growth strategy will be adversely affected.
The success of any store depends in substantial part on its location. There can be no assurance that current locations will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where stores are located could decline in the future, resulting in potentially reduced sales in these locations. If Toys-Delaware cannot obtain desirable locations at reasonable prices, its ability to implement its growth strategy will be adversely affected.

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Toys-Delaware has substantial obligations under long-term leases that could adversely affect its financial condition and prevent it from fulfilling its obligations.
As of February 2, 2013, Toys-Delaware leased 830 of its properties pursuant to long-term space and ground leases with third parties (other than subsidiaries of Toys-Delaware, including us), 346 (including three distribution centers and its headquarters) and 37 (including one distribution center) of which are leased from Propco I and MAP 2005 Real Estate, LLC, respectively. Total third party rent expense, net of sublease income, was $209 million, $185 million and $192 million in fiscals 2012, 2011 and 2010, respectively. Total related party rent expense under leases with affiliates other than subsidiaries of Toys-Delaware was $257 million, $260 million and $264 million for fiscals 2012, 2011 and 2010, respectively. In addition, as of February 2, 2013, Toys-Delaware leased 129 properties from us with total rent expense of $107 million, $106 million and $107 million for fiscals 2012, 2011 and 2010, respectively. Many of Toys-Delaware’s leases provide for scheduled increases in rent. The substantial obligations under its leases could further exacerbate the risks described below under “Toys-Delaware’s substantial indebtedness could adversely affect its ability to raise additional capital to fund its operations, limit its ability to react to changes in the economy or its industries, expose it to interest rate risk to the extent of its variable rate debt and prevent it from meeting its obligations under its various debt instruments and the TRU Propco II Master Lease.”
If Toys-Delaware is unable to renew or replace its current store leases or if it is unable to enter into leases for additional stores on favorable terms, or if one or more of its current leases are terminated prior to expiration of their stated term and it cannot find suitable alternate locations, Toys-Delaware’s growth and profitability could be negatively impacted.
Toys-Delaware currently leases the majority of its stores, including those leased to it by us. Most of its current leases provide for its unilateral option to renew for several additional rental periods at specific rental rates. Toys-Delaware’s ability to re-negotiate favorable terms on an expiring lease or to negotiate favorable terms for a suitable alternate location, and its ability to negotiate favorable lease terms for additional store locations could depend on conditions in the real estate market, competition for desirable properties and Toys-Delaware’s relationships with current and prospective landlords or may depend on other factors that are not within Toys-Delaware’s control. Any or all of these factors and conditions could negatively impact Toys-Delaware’s growth and profitability.
Toys-Delaware’s business is subject to fluctuations in foreign currency exchange rates and such fluctuations may have a material adverse effect on its business, financial condition and results of operations.
Exchange rate fluctuations may affect the translated value of Toys-Delaware’s earnings and cash flow associated with its international operations, as well as the translation of net asset or liability positions that are denominated in foreign currencies. In Canada, Toys-Delaware generates revenues and incurs operating expenses and selling, general and administrative expenses denominated in the local currency. In countries where Toys-Delaware does not operate stores, Toys-Delaware’s licensees pay royalties in USD. However, as the royalties are calculated based on local currency sales, Toys-Delaware’s revenues are still impacted by fluctuations in exchange rates. In fiscal years 2012, 2011 and 2010, 10%, 9% and 9% of Toys-Delaware’s Total revenues, respectively, were completed in a currency other than the USD. In fiscal 2012, Toys-Delaware’s reported operating earnings would have decreased or increased $9 million if the related foreign currencies uniformly weakened or strengthened by 10% relative to the USD.
Toys-Delaware enters into foreign exchange agreements from time to time with financial institutions to reduce its exposure to fluctuations in currency exchange rates referred to as hedging activities. However, these hedging activities may not eliminate foreign currency risk entirely and involve costs and risks of their own. Although Toys-Delaware hedges some exposures to changes in foreign currency exchange rates arising in the ordinary course of business, foreign currency fluctuations may have a material adverse effect on Toys-Delaware’s business, financial condition and results of operations.
Because of Toys-Delaware’s extensive international activities, it could be adversely affected by violations of the United States Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
The United States Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Toys-Delaware’s policies mandate compliance with these anti-bribery laws. Toys-Delaware cannot provide assurance that its internal control policies and procedures always will protect Toys-Delaware from reckless or criminal acts committed by the employees or agents of Toys-Delaware. Violations of these laws, or allegations of such violations, could disrupt Toys-Delaware’s business, damage its reputation and result in a material adverse effect on its financial condition, results of operations and cash flows.

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International events could delay or prevent the delivery of products to Toys-Delaware’s stores, which could negatively affect its sales and profitability.
A significant portion of products sold by Toys-Delaware are manufactured outside of the United States, primarily in Asia. As a result, any event causing a disruption of imports, including labor strikes, work stoppages, boycotts, safety issues on materials, the imposition of trade restrictions in the form of tariffs, embargoes or export controls, “anti-dumping” duties, port security or other events that could slow port activities, could increase the cost and reduce the supply of products available to Toys-Delaware. In addition, port-labor issues, rail congestion and trucking shortages can have an impact on all direct importers. Although Toys-Delaware attempts to anticipate and manage such situations, both Toys-Delaware’s sales and profitability could be adversely impacted by any such developments in the future.
Toys-Delaware’s results may be adversely affected by fluctuations in raw material and energy costs.
Toys-Delaware’s results may be affected by the prices of the components and raw materials used in the manufacture of its toys and juvenile products. These prices may fluctuate based on a number of factors beyond Toys-Delaware’s control, including: oil prices, changes in supply and demand, general economic conditions, labor costs, competition, import duties, tariffs, currency exchange rates and government regulation. In addition, energy costs have fluctuated dramatically in the past. These fluctuations may result in an increase in Toys-Delaware’s transportation costs for distribution, utility costs for its retail stores and overall costs to purchase products from its vendors.
Toys-Delaware may not be able to adjust the prices of its products, especially in the short-term, to recover these cost increases in raw materials and energy. A continual rise in raw material and energy costs could adversely affect consumer spending and demand for Toys-Delaware’s products and increase its operating costs, both of which could have a material adverse effect on its financial condition and results of operations.
A significant disruption to Toys-Delaware’s distribution network or to the timely receipt of inventory could adversely impact sales or increase its transportation costs, which would decrease its profits.
Toys-Delaware relies on its ability to replenish depleted inventory in its stores through deliveries to its distribution centers from vendors and then from the distribution centers or direct ship vendors to its stores by various means of transportation, including shipments by sea, rail, air and truck. Toys-Delaware relies on various third-party vendors to manage services related to the delivery of inventory from distribution centers to our stores. Unexpected delays in those deliveries or increases in transportation costs (including from increased fuel costs) could significantly decrease its ability to make sales and earn profits. In addition, labor shortages or labor disagreements in the transportation industry or long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of deliveries could negatively affect its business.
Product safety issues, including product recalls, could harm Toys-Delaware’s reputation, divert resources, reduce sales and increase costs.
The products Toys-Delaware sells in its stores are subject to regulation by the Federal Consumer Product Safety Commission and similar U.S. state, Canadian and other international regulatory authorities. As a result, such products have been and could be in the future subject to recalls and other remedial actions. Product safety concerns may require Toys-Delaware to voluntarily remove selected products from its stores. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to Toys-Delaware’s reputation and increased customer service costs, which could have a material adverse effect on Toys-Delaware’s business, financial condition and results of operations.
Toys-Delaware’s business exposes it to personal injury and product liability claims which could result in adverse publicity and harm to its brands and its results of operations.
Toys-Delaware is from time to time subject to claims due to the injury of an individual in its stores or on its property. In addition, Toys-Delaware has in the past been subject to product liability claims for the products that it sells. Subject to certain exceptions, Toys-Delaware’s purchase orders generally require the manufacturer to indemnify it against any product liability claims; however, if the manufacturer does not have insurance or becomes insolvent, there is a risk that Toys-Delaware would not be indemnified. Any personal injury or product liability claim made against Toys-Delaware, whether or not it has merit, could be time consuming and costly to defend, result in adverse publicity or damage to Toys-Delaware’s reputation and have an adverse effect on Toys-Delaware’s results of operations.
Adverse litigation judgments or settlements resulting from legal proceedings in which Toys-Delaware may be involved could expose it to monetary damages or limit its ability to operate its business.
Toys-Delaware is involved in private actions, investigations and various other legal proceedings by employees, suppliers, competitors, government agencies or others. The results of such litigation, investigations and other legal proceedings are inherently unpredictable. Any claims against Toys-Delaware, whether meritorious or not, could be time consuming, result in

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costly litigation, require significant amounts of management time and divert significant resources. If any of these legal proceedings were to be determined adversely to Toys-Delaware, Toys-Delaware could be exposed to monetary damages or limits on their ability to operate its business, which could have a material adverse effect on Toys-Delaware’s business, financial condition and results of operations.
Toys-Delaware is subject to certain regulatory and legal requirements. If it fails to comply with regulatory or legal requirements, its business and results of operations may be adversely affected.
Toys-Delaware is subject to numerous regulatory and legal requirements. Its policies and procedures are, to the extent applicable, required to comply with all applicable laws and regulations, including those imposed by the Federal Trade Commission and the Securities and Exchange Commission (“SEC”). In addition, its business activities require it to comply with complex regulatory and legal issues on a local, national and worldwide basis (including, in some cases, more stringent local labor law or regulations). Future legislative and regulatory actions relating to credit cards could also have an adverse impact on Toys-Delaware’s credit card program and its sales. Additionally, Toys-Delaware may be subject to new disclosure and reporting requirements, established under existing or new state or federal laws. Failure to comply with such laws and regulations could adversely affect its operations, involve significant expense and divert management’s attention and resources from other matters, which in turn could harm its business and results of operations.
Toys-Delaware’s business operations could be disrupted if its information technology systems fail to perform adequately or Toys-Delaware is unable to protect the integrity and security of its customers’ information.
Toys-Delaware depends largely upon its information technology systems in the conduct of all aspects of its operations. If Toys-Delaware’s information technology systems fail to perform as anticipated, Toys-Delaware could experience difficulties in virtually any area of its operations, including but not limited to replenishing inventories or in delivering its products to store locations in response to consumer demands. Any of these or other systems-related problems could, in turn, adversely affect Toys-Delaware’s sales and profitability.
Additionally, a compromise of Toys-Delaware’s security systems (or a design flaw in its system environment) could result in unauthorized access to certain personal information about Toys-Delaware’s customers (including credit card information) which could adversely affect its reputation with its customers and others, as well as its operations, and could result in litigation against it or the imposition of penalties. In addition, a security breach could require that it expend significant additional resources related to its information security systems.
Natural disasters, inclement weather, pandemic outbreaks, terrorist acts or disruptive global political events could cause permanent or temporary distribution center or store closures, impair Toys-Delaware’s ability to purchase, receive or replenish inventory or decrease customer traffic, all of which could result in lost sales and otherwise adversely affect Toys-Delaware’s financial performance.
The occurrence of one or more natural disasters, such as hurricanes, fires, floods, earthquakes, tornadoes and volcano eruptions, or inclement weather such as frequent or unusually heavy snow, ice or rain storms, or extended periods of unseasonable temperatures, or the occurrence of pandemic outbreaks, labor strikes, work stoppages, terrorist acts or disruptive global political events, such as civil unrest in countries in which Toys-Delaware’s suppliers are located, or similar disruptions could adversely affect Toys-Delaware’s operations and financial performance. To the extent these events impact one or more of Toys-Delaware’s key vendors or result in the closure of one or more of its distribution centers or a significant number of stores, Toys-Delaware’s operations and financial performance could be materially adversely affected through an inability to make deliveries to its stores and through lost sales. In addition, these events could result in increases in fuel (or other energy) prices or a fuel shortage, delays in opening new stores, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local and overseas vendor, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to Toys-Delaware’s distribution centers or stores, the temporary reduction in the availability of products in its stores and disruption to its information systems. These events also can have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage.
Toys-Delaware’s results of operations could suffer if it loses key management or is unable to attract and retain experienced senior management for its business.
Toys-Delaware’s future success depends to a significant degree on the skills, experience and efforts of its senior management team. The loss of services of any of these individuals, or the inability by Toys-Delaware to attract and retain qualified individuals for key management positions, could harm Toys-Delaware’s business and financial performance.

14


Toys-Delaware may experience fluctuations in its tax obligations and effective tax rate, which could materially and adversely affect its results of operations.
Toys-Delaware is subject to income taxes in the United States, Puerto Rico and Canada. Toys-Delaware records tax expense based on current tax payments and its estimates of future tax payments, which include reserves for estimates of probable settlements of international and domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, Toys-Delaware expects that throughout the year there could be ongoing variability in its quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, Toys-Delaware’s effective tax rate in a given financial statement period may be materially impacted by changes in tax laws, changes in the mix and level of earnings by taxing jurisdiction, changes to existing accounting rules or regulations, or by changes to its ownership or capital structures. Fluctuations in Toys-Delaware’s tax obligations and effective tax rate could materially and adversely affect its results of operations.
Changes to accounting rules or regulations may adversely affect Toys-Delaware’s results of operations.
Changes to existing accounting rules or regulations may impact Toys-Delaware’s future results of operations or cause the perception that Toys-Delaware is more highly leveraged. New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations may materially adversely affect Toys-Delaware’s reported results of operations and financial position.
Toys-Delaware’s total assets include goodwill and substantial amounts of property and equipment. Changes to estimates or projections related to such assets, or operating results that are lower than its current estimates at certain store locations, may cause Toys-Delaware to incur impairment charges that could adversely affect its results of operations.
Toys-Delaware’s total assets include substantial amounts of property and equipment and goodwill. Toys-Delaware makes certain estimates and projections in connection with impairment analyses for these assets, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, “Property, Plant and Equipment” (“ASC 360”), and ASC Topic 350, “Intangibles — Goodwill and Other” (“ASC 350”). Toys-Delaware also reviews the carrying value of these assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with ASC 360 or ASC 350. Toys-Delaware will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. These calculations require Toys-Delaware to make a number of estimates and projections of future results. If these estimates or projections change, Toys-Delaware may be required to record additional impairment charges on certain of these assets. If these impairment charges are significant, Toys-Delaware’s results of operations would be adversely affected.
Toys-Delaware may from time to time pursue acquisitions, which could have an adverse impact on its business, as could the integration of the businesses following acquisition.
Toys-Delaware may from time to time acquire complementary companies or businesses. Acquisitions may result in unanticipated costs, delays or other operational or financial problems related to integrating the acquired company and business with Toys-Delaware, which may result in the diversion of its capital and its management’s attention from other business issues and opportunities. Toys-Delaware may not be able to successfully integrate operations that it acquires, including their personnel, technology, financial systems, distribution and general business operations and procedures. Toys-Delaware cannot provide assurance that any acquisition it makes will be successful and its operating results may be adversely impacted by the integration of a new business and its financial results.
An investment group led by Bain Capital Partners, LLC, Kohlberg Kravis Roberts & Co. L.P., and Vornado Realty Trust (collectively, the “Sponsors”) control Toys-Delaware and may have conflicts of interest with it in the future.
Investment funds or groups advised by or affiliated with the Sponsors currently indirectly control Toys-Delaware through their ownership of approximately 98% of TRU’s voting common stock. As a result, the Sponsors have control over Toys-Delaware’s decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders. In addition, the Sponsors may have an interest in pursuing dispositions, acquisitions, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to Toys-Delaware as a company.
The Sponsors may direct Toys-Delaware to make significant changes to its business operations and strategy, including with respect to, among other things, store openings and closings, new product and service offerings, sales of real estate and other assets, employee headcount levels and initiatives to reduce costs and expenses. We cannot provide assurance that Toys-Delaware’s future business operations will remain broadly in line with its existing operations or that significant real estate and other assets will not be sold.

15


The Sponsors are also in the business of making investments for their own accounts in companies, and may from time to time acquire and hold interests in businesses that compete directly or indirectly with Toys-Delaware. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to Toys-Delaware’s business and, as a result, those acquisition opportunities may not be available to Toys-Delaware. So long as investment funds associated with or designated by the Sponsors continue to indirectly own a significant amount of the outstanding shares of TRU’s common stock, the Sponsors will continue to be able to strongly influence or effectively control TRU’s and, accordingly, Toys-Delaware’s decisions.
Risks Related to the Master Tenant’s and TRU’s Substantial Indebtedness
Toys-Delaware’s substantial indebtedness could adversely affect its ability to raise additional capital to fund its operations or refinance its maturing debt, limit its ability to react to changes in the economy or its industries, expose it to interest rate risk to the extent of its variable rate debt and prevent it from meeting its obligations under its various debt instruments and the TRU Propco II Master Lease.
Toys-Delaware is highly leveraged. As of February 2, 2013, Toys-Delaware’s total long-term indebtedness was $2.6 billion, of which $2.4 billion was secured indebtedness. Toys-Delaware’s substantial indebtedness could have significant consequences, including, among others, the following:
increasing its vulnerability to general economic and industry conditions;
requiring a substantial portion of its cash flows from operating activities to be dedicated to the payment of principal and interest on its indebtedness, and as a result, reducing its ability to use its cash flows to fund its operations and capital expenditures, capitalize on future business opportunities and expand its business and execute its strategy;
increasing the difficulty for it to make scheduled payments on its outstanding debt and other obligations, including the TRU Propco II Master Lease, as its business may not be able to generate sufficient cash flows from operating activities to meet its obligations;
exposing it to the risk of increased interest expense due to changes in borrowing spreads and short-term interest rates;
causing it to make non-strategic divestitures;
limiting its ability to obtain additional financing for working capital, capital expenditures, debt service requirements and general, corporate or other purposes; and
limiting its ability to adjust to changing market conditions and reacting to competitive pressure, placing it at a competitive disadvantage compared to its competitors who are less leveraged.
Despite Toys-Delaware’s current level of indebtedness, it may still be able to incur substantially more debt. This could further exacerbate the risks to its financial condition described above.
Toys-Delaware may be able to incur additional indebtedness in the future, including under its current secured revolving credit agreement, subject to the restrictions contained in its debt instruments. Although its indentures, credit agreements and the other documents governing its other indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent Toys-Delaware from incurring obligations that do not constitute indebtedness. If new indebtedness is added to its current debt levels, the related risks that it now faces could intensify.
Toys-Delaware may not be able to generate sufficient cash to service all of its indebtedness and/or its obligations, including under the TRU Propco II Master Lease, and may not be able to refinance its indebtedness. If it is unable to do so, it may be forced to take other actions to satisfy its obligations under its indebtedness, its obligations under the TRU Propco II Master Lease and/or other obligations, which may not be successful.
Toys-Delaware’s ability to make scheduled payments on or to refinance its debt obligations depends on its financial condition and operating performance, its lenders’ financial stability, which are subject to prevailing global economic and market conditions and to certain financial, business and other factors beyond its control. Even if it were able to refinance or obtain additional financing, the costs of new indebtedness could be substantially higher than the costs of its existing indebtedness.
If Toys-Delaware’s cash flows and capital resources are insufficient to fund its debt service obligations or it is unable to refinance its indebtedness, it may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure its indebtedness. These alternative measures may not be successful and may not permit it to meet its scheduled debt service obligations. If Toys-Delaware’s operating results and available cash are insufficient to meet its debt service obligations, it could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations. Toys-Delaware may not be able to consummate those dispositions, or

16


the proceeds from the dispositions may not be adequate to meet any debt service obligations then due. Additionally, in the event of such liquidity problems, Toys-Delaware may become unable to meet its obligations under the TRU Propco II Master Lease which may impact our cash flow and consequently, our ability to meet our obligations under the Secured Notes. If Toys-Delaware was unable to repay amounts when due, the lenders could proceed against the collateral granted to them to secure that indebtedness.
Toys-Delaware’s debt agreements contain covenants that limit its flexibility in operating its business.
The agreements governing Toys-Delaware’s indebtedness contain various covenants that limit its ability to engage in specified types of transactions, and may adversely affect its ability to operate its business. Among other things, these covenants limit Toys-Delaware’s and its subsidiaries’ ability to:
incur certain additional indebtedness;
transfer money between Toys-Delaware, its various subsidiaries and TRU;
pay dividends on, repurchase or make distributions with respect to its or its subsidiaries’ capital stock or make other restricted payments;
issue stock of subsidiaries;
make certain investments, loans or advances;
transfer and sell certain assets;
create or permit liens on assets;
consolidate, merge, sell or otherwise dispose of all or substantially all of its assets;
enter into certain transactions with its affiliates; and
amend certain documents.
A breach of any of these covenants could result in default under one or more of Toys-Delaware’s debt agreements, which could prompt the lenders to declare all amounts outstanding under one or more of the debt agreements to be immediately due and payable and terminate all commitments to extend further credit. If Toys-Delaware were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. If the lenders under the debt agreements accelerate the repayment of borrowings, Toys-Delaware may not have sufficient assets and funds to repay the borrowings under its debt agreements or meets its obligations under the TRU Propco II Master Lease.
TRU is highly leveraged and may need to refinance its debt in the future, which refinancing may not be available.
As of February 2, 2013, total indebtedness of TRU and its subsidiaries (including us) was $5.3 billion, of which $3.2 billion was secured indebtedness. TRU’s existing cash balances and cash flows from operating activities may not be sufficient to fund its projected cash needs. TRU may not be able to access additional sources of refinancing on similar terms or pricing as those that are currently in place, or at all, or otherwise obtain other sources of funding. An inability to access replacement or additional sources of liquidity to fund TRU’s cash needs or to refinance or otherwise fund the repayment of its maturing debt could adversely affect its financial condition, results of operations and ability to make payments on its debt. While TRU is not obligated to make payments under the TRU Propco II Master Lease or the Secured Notes, in the event that TRU were to become a debtor in a Bankruptcy Case, a creditor, receiver, conservator or the trustee in such bankruptcy might request a court to order TRU’s assets and liabilities be consolidated with ours or Toys-Delaware’s (including its properties) for the satisfaction of claims of creditors of TRU. We, Toys-Delaware or TRU may become subject to bankruptcy proceedings and in that event our respective rights and obligations may be subject to material modification.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

17


ITEM 2.
PROPERTIES
The following summarizes our properties as of February 2, 2013:
Ownership
 
Total Number of
Properties
Owned
 
116
Ground-leased(1)
 
13
Total
 
129
(1)
Owned buildings on leased land.
See also section of Item 1 entitled “Geographic Distribution of Stores” of this Annual Report on Form 10-K for more information on our Properties.
ITEM 3.
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 4.
MINE SAFETY DISCLOSURE
None.

18


PART II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of May 3, 2013, all of our outstanding membership interests were privately held by our sole member, Giraffe Junior Holdings, LLC.
See Note 5 to the Financial Statements entitled “LONG-TERM DEBT” for a description of restrictions on our ability to pay dividends.
We evaluate our cash balances on an ongoing basis and periodically distribute cash to our parent companies. During fiscal 2012, we made cash distributions of $17 million in dividends. During fiscal 2011, we made cash distributions of $23 million and $4 million in dividends and return of capital, respectively.
ITEM 6.
SELECTED FINANCIAL DATA
Item 6 is omitted as we meet the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 historical results of operations during the periods presented and our financial condition. This MD&A should be read in conjunction with our Financial Statements and the accompanying notes, and contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” and Item 1A entitled “RISK FACTORS” of this Annual Report on Form 10-K. Our MD&A includes the following sections:
EXECUTIVE OVERVIEW provides an overview of our business.
RESULTS OF OPERATIONS provides an analysis of our results of operations for fiscal 2012 compared to fiscal 2011 and fiscal 2011 compared to fiscal 2010. With the exception of fiscal 2012, which includes 53 weeks, all other fiscal years presented include 52 weeks.
LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, financing and contractual obligations.
CRITICAL ACCOUNTING POLICIES provides a discussion of our accounting policies that require critical judgment, assumptions and estimates.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS provides a brief description of significant accounting standards which were adopted during fiscal 2012. This section also refers to Note 9 to our Financial Statements entitled “RECENT ACCOUNTING PRONOUNCEMENTS” for accounting standards which we have not yet been required to implement and may be applicable to our future operations.
All information in this MD&A is presented on a historical basis and reflects results of continuing operations for all periods presented.
EXECUTIVE OVERVIEW
Our Business
We are a special purpose entity, owned indirectly by TRU, through Toys-Delaware, and formed in July 2005. We own fee and ground leasehold interests in 129 properties in various retail markets throughout the United States. Under the 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. Substantially all of our revenues and cash flows are derived from payments from Toys-Delaware under the TRU Propco II Master Lease. For the financial statements for fiscal year ended February 2, 2013 and other information about our master tenant, Toys-Delaware, see Exhibit number 99.1 to this report.
Our primary business operations consist of leasing properties to our affiliate Toys-Delaware, servicing our debt via payments on our debt instruments and, subject to compliance with our debt agreements, distributing cash to our parent companies. Our management does not currently have plans to purchase additional properties. As a result, we do not believe we are subject to risks associated with obtaining financing for individual properties when availability of capital in the marketplace may be limited or may be subject to the overall economic environment. Substantially all of our cash revenues are subject to fixed increases under the TRU Propco II Master Lease which will expire in 2030. Also, interest payments under the senior secured 8.500% notes due fiscal 2017 (the “Secured Notes”) are fixed at 8.500%.

19


Although a majority of our properties are owned, we lease several of our properties from third parties and as these leases expire, we may need to renew these leases on terms that may not be as favorable as under the expiring lease. However, none of our leases expire prior to the maturity of the Secured Notes. Also, the terms of the TRU Propco II Master Lease allow us to charge common area maintenance expenses and certain other operating expenses to Toys-Delaware.
Material Trends and Uncertainties
Our primary source of rental revenue and cash flows is derived from the leasing arrangements we have entered into with Toys-Delaware under the TRU Propco II Master Lease which expires in fiscal 2030. We record rental revenue using the straight-line method, which results in recording a consistent rate of revenue over the terms of our lease agreements even when cash rents received increase or decrease over the lease term. Rental payments under the TRU Propco II Master Lease are scheduled to increase by 10% for each property on February 1, 2015, February 1, 2020 and February 1, 2025. Future annual related party base rents may be reduced by payments received from Toys-Delaware by us as a result of an early termination of a lease, as set forth under the terms of the TRU Propco II Master Lease, or the successful execution of the sale of such properties by us to a third party. Our largest expense is interest expense; the payment and recording of which is fixed over the term of the Secured Notes.
RESULTS OF OPERATIONS
Fiscal 2012 compared to Fiscal 2011
Net Earnings
($ In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
$ Change  
 
% Change  
Net earnings
 
$
22,529

 
$
22,989

 
$
(460
)
 
(2.0
)%
Net earnings decreased by a nominal amount in fiscal 2012 compared to fiscal 2011.
Total Revenues
($ In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
$ Change  
 
% Change  
Total revenues
 
$
119,856

 
$
119,855

 
$
1

 
%
Total revenues remained consistent in fiscal 2012 compared to fiscal 2011.
Depreciation
($ In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
$ Change  
 
% Change  
Depreciation
 
$
13,641

 
$
12,332

 
$
1,309

 
10.6
%
Depreciation increased by $1.3 million, or 10.6%, to $13.6 million in fiscal 2012 compared to $12.3 million in fiscal 2011. The increase was primarily due to accelerated depreciation for certain properties, which we have committed to exit prior to the end of the useful lives of the assets.
Rental Expense
($ In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
$ Change  
 
% Change  
Rental expense
 
$
1,592

 
$
3,256

 
$
(1,664
)
 
(51.1
)%
Rental expense decreased by $1.7 million, or 51.1%, to $1.6 million in fiscal 2012 compared to $3.3 million in fiscal 2011. The decrease was primarily due to an adjustment to the non-cash straight-line third party rent amounts related to a change in estimated lease terms, as we have committed to exit certain properties early.
Common Area Maintenance Expenses
($ In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
$ Change  
 
% Change  
Common area maintenance expenses
 
$
12,906

 
$
13,338

 
$
(432
)
 
(3.2
)%

20


Common area maintenance expenses decreased by a nominal amount in fiscal 2012 compared to fiscal 2011. 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
($ In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
$ Change  
 
% Change  
Other operating expenses
 
$
1,839

 
$
1,892

 
$
(53
)
 
(2.8
)%
Other operating expenses decreased by a nominal amount in fiscal 2012 compared to fiscal 2011.
Interest Expense, Net
($ In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
$ Change  
 
% Change  
Interest expense, net
 
$
67,349

 
$
66,048

 
$
1,301

 
2.0
%
Interest expense, net increased by $1.3 million, or 2.0%, to $67.3 million in fiscal 2012 compared to $66.0 million in fiscal 2011. The reporting period for fiscal 2012 included 53 weeks compared to 52 weeks for fiscal 2011, which included an additional week of interest expense.
Fiscal 2011 compared to Fiscal 2010
Net Earnings
($ In thousands)
 
Fiscal
2011
 
Fiscal
2010
 
$ Change  
 
% Change  
Net earnings
 
$
22,989

 
$
22,660

 
$
329

 
1.5
%
Net earnings increased by a nominal amount in fiscal 2011 compared to fiscal 2010.
Total Revenues
($ In thousands)
 
Fiscal
2011
 
Fiscal
2010
 
$ Change  
 
% Change  
Total revenues
 
$
119,855

 
$
119,627

 
$
228

 
0.2
%
Total revenues increased by a nominal amount in fiscal 2011 compared to fiscal 2010.
Depreciation
($ In thousands)
 
Fiscal
2011
 
Fiscal
2010
 
$ Change  
 
% Change  
Depreciation
 
$
12,332

 
$
12,133

 
$
199

 
1.6
%
Depreciation increased by a nominal amount in fiscal 2011 compared to fiscal 2010.
Rental Expense
($ In thousands)
 
Fiscal
2011
 
Fiscal
2010
 
$ Change  
 
% Change  
Rental expense
 
$
3,256

 
$
4,232

 
$
(976
)
 
(23.1
)%
Rental expense decreased by $1.0 million, or 23.1%, to $3.2 million in fiscal 2011 compared to $4.2 million in fiscal 2010. The decrease was primarily due to a non-cash cumulative straight-line lease accounting correction recorded in fiscal 2010.
Common Area Maintenance Expenses
($ In thousands)
 
Fiscal
2011
 
Fiscal
2010
 
$ Change  
 
% Change  
Common area maintenance expenses
 
$
13,338

 
$
12,869

 
$
469

 
3.6
%

21


Common area maintenance expenses increased by a nominal amount in fiscal 2011 compared to fiscal 2010. 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
($ In thousands)
 
Fiscal
2011
 
Fiscal
2010
 
$ Change  
 
% Change  
Other operating expenses
 
$
1,892

 
$
1,746

 
$
146

 
8.4
%
Other operating expenses increased by a nominal amount in fiscal 2011 compared to fiscal 2010.
Interest Expense, Net
($ In thousands)
 
Fiscal
2011
 
Fiscal
2010
 
$ Change  
 
% Change  
Interest expense, net
 
$
66,048

 
$
65,987

 
$
61

 
0.1
%
Interest expense, net increased by a nominal amount in fiscal 2011 compared to fiscal 2010.
Liquidity and Capital Resources
Overview
As of February 2, 2013, we were in compliance with all of the covenants related to 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.
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 our expected cash flow requirements for the next twelve months.
Cash Flows
(In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
Fiscal
2010
Net cash provided by operating activities
 
$
34,889

 
$
26,571

 
$
24,219

Net cash used in financing activities
 
(16,840
)
 
(27,381
)
 
(27,541
)
Net increase (decrease) during period in Cash and cash equivalents
 
$
18,049

 
$
(810
)
 
$
(3,322
)
Cash Flows Provided by Operating Activities
Net cash provided by operating activities for fiscal 2012 was $34.9 million, an increase of $8.3 million compared to fiscal 2011. The increase in cash provided by operating activities was primarily due to an increase in collections of base rent due to the timing of rental payments received as well as a decrease in amounts Due from affiliate, net associated with the timing of real estate taxes and certain tenant reimbursements.
Net cash provided by operating activities for fiscal 2011 was $26.6 million, an increase of $2.4 million compared to fiscal 2010. The increase in cash provided by operating activities was primarily due to two fiscal 2010 items that did not recur in fiscal 2011. The first half of fiscal 2010 included 11 days of incremental interest payments due to the timing of the first interest payment under the Secured Notes totaling $1.9 million as well as $1.3 million in payments related to costs associated with the issuance of the Secured Notes in fiscal 2009. These were partially offset by an increase in amounts Due from affiliate, net associated with higher real estate taxes as well as the timing of certain tenant reimbursements.
Cash Flows Used in Financing Activities
Net cash used in financing activities for fiscal 2012 was $16.8 million, a decrease of $10.5 million compared to fiscal 2011. The decrease in net cash used in financing activities was due to a decrease in Distributions.
Net cash used in financing activities for fiscal 2011 was $27.4 million, consisting exclusively of Distributions, a decrease of $0.1 million compared to fiscal 2010. The decrease in net cash used in financing activities was primarily due to capitalized debt issuance costs of $0.9 million incurred in fiscal 2010 related to the issuance of the Secured Notes in fiscal 2009 and a

22


decline in Distributions of $0.5 million. These decreases were partially offset by Capital contributions of $1.2 million, which did not recur in fiscal 2011.
Debt
Refer to Note 5 to the Financial Statements entitled “LONG-TERM DEBT.” for further details regarding our Secured Notes.
From time to time, we, TRU, its subsidiaries, the Sponsors or their affiliates, may acquire debt or debt securities issued by us in open market transactions, tender offers, privately negotiated transactions or otherwise. Any such transactions, and the amounts involved, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Refer to Note 8 to the Financial Statements entitled “RELATED PARTY TRANSACTIONS.”
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. The following table summarizes our contractual obligations associated with our Long-term debt and other obligations as of February 2, 2013:
 
 
Payments Due By Period
(In thousands)
 
Fiscal
2013
 
Fiscals
2014 & 2015
 
Fiscals
2016 & 2017
 
Fiscals
2018 and
thereafter
 
Total
Operating leases (1)
 
$
2,407

 
$
4,328

 
$
3,184

 
$
1,371

 
$
11,290

Long-term debt
 

 

 
725,000

 

 
725,000

Interest payments
 
61,625

 
123,250

 
123,250

 

 
308,125

Total contractual obligations
 
$
64,032

 
$
127,578

 
$
851,434

 
$
1,371

 
$
1,044,415

(1)
Excluded from Operating leases displayed above are approximately $83 million related to options to extend ground lease terms that are reasonably assured of being exercised, the balance of which predominantly relates to fiscals 2018 and thereafter.
Obligations under our operating leases in the above table do not include payments for real estate taxes or maintenance and insurance. The following table presents these expenses for fiscals 2012, 2011 and 2010:
(In thousands)
 
Fiscal
2012
 
Fiscal
2011
 
Fiscal
2010
Real estate taxes
 
$
11,090

 
$
11,292

 
$
11,222

Maintenance and insurance
 
1,694

 
1,780

 
1,420

Total
 
$
12,784

 
$
13,072

 
$
12,642

Off-Balance Sheet Arrangements
None.
CRITICAL ACCOUNTING POLICIES
Our 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 Financial Statements.
We believe the following are our most critical accounting policies that include significant judgments and estimates used in the preparation of our Financial Statements. We consider an accounting policy to be critical if it requires assumptions to be made that were uncertain at the time they were made, and if changes in these assumptions could have a material impact on our financial condition or results of operations.
Long-lived Asset Impairment
We evaluate the carrying value of all long-lived assets, which include land and buildings, for impairment whenever events or changes in circumstances, including the tenant’s intent to exit a property in advance of the TRU Propco II Master Lease term, indicate that the carrying value of an asset may not be recoverable, in accordance with ASC 360. This evaluation requires

23


management to make judgments relating to an estimate of undiscounted future cash flows to determine whether an asset group is recoverable. Our calculation of undiscounted cash flows takes into consideration any termination payments to be received from Toys-Delaware as set forth under the terms of the TRU Propco II Master Lease where Toys-Delaware is required to make a termination payment equal to the excess (if any) of the net present value of the base rent for such Property over the remaining term for such Property, discounted at 10% per annum. If as a result of this evaluation, a long-lived asset group is found to be non-recoverable, we record an impairment charge equal to the amount by which the asset group’s carrying value exceeds its fair value. We estimate the fair value of an asset group using a valuation method such as discounted cash flows or a relative, market-based approach.
Revenue Recognition
Base rental revenue is reported on a straight-line basis over the non-cancelable terms of our respective leases. Straight-line rent receivable from affiliate as reported on the Balance Sheets represents rental income recognized in excess of rent payments actually received pursuant to the terms of the TRU Propco II Master Lease. The leases also typically provide for tenant reimbursements of common area maintenance and other operating expenses and real estate taxes. Accordingly, revenues associated with tenant reimbursements are recognized in the period in which the expenses are incurred based upon the tenant lease provision. Ancillary and other property-related income, which includes the leasing of vacant space to temporary tenants, is recognized in the period earned. Lease termination fees are included in Base rents and recognized and earned upon termination of a tenant’s lease and relinquishment of space in which we have no further obligation to the tenant.
Deferred Rent
The difference between recognized rental expense and amounts payable under the leases is recorded as Deferred third party rent liabilities. We recognize operating leases on a straight-line basis over the lease term, which includes renewal options only if those options are specified in the lease agreement and if failure to exercise the renewal option imposes a significant economic penalty to us. For Ground Lease Locations, we include renewal options in the lease term through the estimated useful life of the owned building located on the property as failure to renew a ground lease during the estimated useful life of the building would result in forgoing an economic benefit given our significant capital investment at the inception of the lease to construct a new building.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2011, FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which eliminates the option to report other comprehensive income and its components in the Statement of Changes in Stockholder’s Equity and provides entities with two presentation alternatives. As of January 29, 2012, the Company adopted ASU 2011-05 by electing to present items of net earnings and other comprehensive income in two separate consecutive statements (if applicable). The adoption of ASU 2011-05 did not have an impact on our Financial Statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. As of January 29, 2012, we adopted ASU 2011-04 and applied this guidance prospectively. The adoption of ASU 2011-04 did not have an impact on our Financial Statements.
Refer to Note 9 to the Financial Statements entitled “RECENT ACCOUNTING PRONOUNCEMENTS” for a discussion of accounting standards which we have not yet been required to implement and may be applicable to our future operations and their expected impact on the Financial Statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not participate in speculative derivative trading.
Interest Rate Exposure
During fiscal 2012, we had only fixed rate debt and had not entered into any derivatives.

24


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

25


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Member of
Toys “R” Us Property Company II, LLC:
We have audited the accompanying balance sheets of Toys “R” Us Property Company II, LLC (the “Company”) as of February 2, 2013 and January 28, 2012, and the related statements of operations, changes in member’s deficit, and cash flows for each of the three fiscal years in the period ended February 2, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of February 2, 2013 and January 28, 2012, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 2, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
May 3, 2013

26


TOYS “R” US PROPERTY COMPANY II, LLC
STATEMENTS OF OPERATIONS
 
 
 
Fiscal Years Ended
(In thousands)
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
Rental revenues:
 
 
 
 
 
 
Base rents
 
$
106,950

 
$
106,517

 
$
106,758

Tenant reimbursements
 
12,906

 
13,338

 
12,869

Total revenues
 
119,856

 
119,855

 
119,627

Depreciation
 
13,641

 
12,332

 
12,133

Rental expense
 
1,592

 
3,256

 
4,232

Common area maintenance expenses
 
12,906

 
13,338

 
12,869

Other operating expenses
 
1,839

 
1,892

 
1,746

Total operating expenses
 
29,978

 
30,818

 
30,980

Operating earnings
 
89,878

 
89,037

 
88,647

Interest expense, net
 
67,349

 
66,048

 
65,987

Net earnings
 
$
22,529

 
$
22,989

 
$
22,660

See Notes to the Financial Statements.

27


TOYS “R” US PROPERTY COMPANY II, LLC
BALANCE SHEETS
 
(In thousands)
 
February 2,
2013
 
January 28,
2012
ASSETS
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
27,658

 
$
9,609

Due from affiliate, net
 
5,097

 
5,944

Prepaid expenses
 
1,338

 
905

Total current assets
 
34,093

 
16,458

Real Estate, Net:
 
 
 
 
Land
 
169,937

 
169,937

Buildings, net
 
159,815

 
166,181

Property and leasehold improvements, net
 
38,974

 
46,249

Total real estate, net
 
368,726

 
382,367

Straight-line rent receivable from affiliate
 
69,974

 
57,800

Debt issuance costs
 
17,372

 
21,055

Total Assets
 
$
490,165

 
$
477,680

 
 
 
 
 
LIABILITIES AND MEMBER’S DEFICIT
 
 
 
 
Current Liabilities:
 
 
 
 
Accrued interest
 
$
10,835

 
$
9,934

Real estate taxes payable
 
5,271

 
5,668

Deferred related party revenue
 
7,003

 
730

Deferred third party rent liabilities
 
534

 

Other current liabilities
 
425

 
481

Total current liabilities
 
24,068

 
16,813

Long-term debt
 
717,989

 
716,849

Deferred third party rent liabilities
 
12,821

 
14,420

Member’s deficit
 
(264,713
)
 
(270,402
)
Total Liabilities and Member’s Deficit
 
$
490,165

 
$
477,680

See Notes to the Financial Statements.

28


TOYS “R” US PROPERTY COMPANY II, LLC
STATEMENTS OF CASH FLOWS
 
 
 
Fiscal Years Ended
(In thousands)
 
February 2,
2013
 
January 28,
2012
 
January 29,
2011
Cash Flows from Operating Activities:
 
 
 
 
 
 
Net earnings
 
$
22,529

 
$
22,989

 
$
22,660

Adjustments to reconcile Net earnings to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation
 
13,641

 
12,332

 
12,133

Amortization and write-off of debt issuance costs
 
3,683

 
3,619

 
3,536

Amortization of original issue discount
 
1,140

 
1,028

 
972

Changes in operating assets and liabilities:
 
 
 
 
 
 
Due from affiliate, net
 
847

 
(1,853
)
 
2

Prepaid expenses
 
(433
)
 
541

 
(185
)
Straight-line rent receivable from affiliate and Deferred third party rent liabilities
 
(13,239
)
 
(12,687
)
 
(12,131
)
Accrued interest, Real estate taxes payable and Other current liabilities
 
448

 
358

 
(3,011
)
Deferred related party revenue
 
6,273

 
244

 
243

Net cash provided by operating activities
 
34,889

 
26,571

 
24,219

Cash Flows from Financing Activities:
 
 
 
 
 
 
Capitalized debt issuance costs
 

 

 
(919
)
Capital contributions
 

 

 
1,238

Distributions
 
(16,840
)
 
(27,381
)
 
(27,860
)
Net cash used in financing activities
 
(16,840
)
 
(27,381
)
 
(27,541
)
Cash and cash equivalents:
 
 
 
 
 
 
Net increase (decrease) during period
 
18,049

 
(810
)
 
(3,322
)
Cash and cash equivalents at beginning of period
 
9,609

 
10,419

 
13,741

Cash and cash equivalents at end of period
 
$
27,658

 
$
9,609

 
$
10,419

 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
 
 
Interest paid
 
$
61,625

 
$
61,625

 
$
63,508

Non-Cash Financing Information:
 
 
 
 
 
 
Adjustment to the carrying value of net assets previously acquired
 
$

 
$

 
$
(2,166
)
Contribution of properties, net
 
$

 
$

 
$
784

See Notes to the Financial Statements.

29


TOYS “R” US PROPERTY COMPANY II, LLC
STATEMENTS OF CHANGES IN MEMBER’S DEFICIT
 
 
 
 
(In thousands)
 
Member’s
Deficit
Balance, January 30, 2010
 
$
(260,666
)
Net earnings for the period
 
22,660

Capital contribution
 
1,238

Distributions
 
(27,860
)
Adjustment to the carrying value of net assets previously acquired
 
(2,166
)
Contribution of properties, net
 
784

Balance, January 29, 2011
 
$
(266,010
)
Net earnings for the period
 
22,989

Distributions
 
(27,381
)
Balance, January 28, 2012
 
$
(270,402
)
Net earnings for the period
 
22,529

Distributions
 
(16,840
)
Balance, February 2, 2013
 
$
(264,713
)
 
 
 
See Notes to the Financial Statements.

30


Toys “R” Us Property Company II, LLC
Notes to the Financial Statements
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
As used herein the “Company,” “we,” “us,” or “our” means Toys “R” Us Property Company II, LLC (“TRU Propco II”), a Delaware limited liability company, which 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.
Fiscal Year
Our fiscal year ends on the Saturday nearest to January 31. Unless otherwise stated, references to years in this report relate to the fiscal years ended below:
Fiscal Year
 
Number of Weeks  
 
Ended
2012
 
53
 
February 2, 2013
2011
 
52
 
January 28, 2012
2010
 
52
 
January 29, 2011
Use of Estimates
The preparation of our 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 other factors that we believe are reasonable under the circumstances. Actual results may differ materially from these estimates and such differences could have a material impact on our Financial Statements.
Prior Period Correction
During fiscal 2010, we recorded an approximate $3 million adjustment to increase Deferred rent liabilities on our 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 $2 million and was recorded as an increase in Member’s Deficit. The remaining portion of this correction of approximately $1 million increased Rental expense on the Statement of Operations for the period ended January 29, 2011. In addition, in connection with our master lease agreement, a corresponding correcting adjustment was recorded of approximately $1 million to increase Base rents on the Statement of Operations and Straight-line rent receivable from affiliate on the Balance Sheet for the period subsequent to the fiscal 2005 reorganization. Management concluded that this correction did not have a material impact on the financial statements for the period ended January 29, 2011 or any previously reported financial statements.
Cash and cash equivalents
We consider our highly liquid investments with original maturities of three months or less at acquisition to be cash equivalents.
Real Estate, Net
We record depreciation using the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the respective leases, if applicable, which for buildings is generally 50 years and for buildings on ground leases is the lesser of the lease term or 50 years, and for leasehold improvements is the lesser of the lease term or 25 years.

31


Impairment of Long-Lived Assets
We evaluate the carrying value of all long-lived assets, which include land and buildings, for impairment whenever events or changes in circumstances, including the tenant’s intent to exit a property in advance of the Amended and Restated Master Lease Agreement (the “TRU Propco II Master Lease”) term, indicate that the carrying value of an asset may not be recoverable, in accordance with Accounting Standards Codification (“ASC”) Topic 360, “Property, Plant and Equipment” (“ASC 360”). This evaluation requires management to make judgments relating to an estimate of undiscounted future cash flows to determine whether an asset group is recoverable. Our calculation of undiscounted cash flows takes into consideration any termination payments to be received from Toys-Delaware as set forth under the terms of the TRU Propco II Master Lease where Toys-Delaware is required to make a termination payment equal to the excess (if any) of the net present value of the base rent for such Property over the remaining term for such Property, discounted at 10% per annum. If as a result of this evaluation, a long-lived asset group is found to be non-recoverable, we record an impairment charge equal to the amount by which the asset group’s carrying value exceeds its fair value. We estimate the fair value of an asset group using a valuation method such as discounted cash flows or a relative, market-based approach. There were no impairment charges in fiscals 2012, 2011 and 2010.
Rental Revenues
Base rental revenues are recognized on a straight-line basis over the non-cancelable terms of the related leases. Differences between rental revenues recognized and amounts due per the respective lease agreements are recorded on our Balance Sheets as Straight-line rent receivable from affiliate. Tenant reimbursements for taxes, insurance, and other operating expenses are billed and recognized as revenues in the period the applicable costs are incurred.
The TRU Propco II Master Lease requires Toys-Delaware to make a payment to us upon early termination of a lease, as set forth under the terms of the TRU Propco II Master Lease, or the successful execution of the sale of such properties by us 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. There were no termination payments required to be made during fiscals 2012, 2011 and 2010.
Debt Issuance Costs
We defer debt issuance costs and amortize such costs into Interest expense, net over the term of the related debt facility. Debt issuance costs amortized to Interest expense, net were approximately $4 million for fiscals 2012, 2011 and 2010, respectively. Unamortized amounts at February 2, 2013 and January 28, 2012 were approximately $17 million and $21 million, respectively.
Deferred Rent
We recognize fixed minimum rent expense on non-cancelable leases on a straight-line basis over the term of each individual lease starting at the date of possession, including the build-out period, and record the difference between the recognized rental expense and amounts payable under the leases as Deferred third party rent liabilities. Deferred third party rent liabilities are recorded in our Balance Sheets in the total amount of $13 million and $14 million at February 2, 2013 and January 28, 2012, respectively. Landlord incentives and abatements received are included in Deferred third party rent liabilities and amortized over the term of the lease.
Leases for Lessee only
We lease land used in our operations. We account for our leases under the provisions of ASC Topic 840, “Leases,” which require that leases be evaluated and classified as operating or capital leases for financial reporting purposes.
Operating leases are recorded on a straight-line basis over the lease term. At the inception of a lease, we determine the lease term by assuming the exercise of renewal options that are reasonably assured if a significant economic penalty exists for not exercising such options. Renewal options are exercised at our sole discretion. The expected lease term is used to determine whether a lease is capital or operating and is used to calculate straight-line rent expense. Additionally, the useful life of buildings and leasehold improvements are limited by the expected lease term. Refer to Note 3 entitled “LEASES” for further details.
Substantially all of our leases include options that allow us to renew or extend the lease term beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease. Such terms and conditions include rental rates agreed upon at the inception of the lease that could represent below or above market rental rates later in the life of the lease, depending upon market conditions at the time of such renewal or extension. In addition, many leases include early termination options, which can be exercised under specified conditions, including upon damage, destruction or condemnation of a specified percentage of the value or land area of the property.

32


Income Taxes
No income tax expense or benefit is recognized in the accompanying Financial Statements. We are treated as a disregarded entity for income tax purposes and, accordingly, our taxable income or loss is included in the income tax returns of our owners.
We have calculated the net basis of our assets and liabilities for income tax purposes as if the Company was a stand-alone entity (i.e., on a “Separate Company” basis). The net basis of our assets and liabilities for income tax purposes is approximately $59 million higher than the amount reported in our Financial Statements.
NOTE 2 – REAL ESTATE, NET
(In thousands)
 
February 2,
2013
 
January 28,
2012
Land
 
$
169,937

 
$
169,937

Buildings
 
273,285

 
273,285

Property and leasehold improvements
 
132,173

 
132,173

 
 
575,395

 
575,395

Less: accumulated depreciation
 
(206,669
)
 
(193,028
)
Total
 
$
368,726

 
$
382,367

Subsequent Event
Subsequent to fiscal 2012, we sold an owned property to an unrelated third party for gross proceeds of approximately $2 million. Additionally, we had an early termination of a ground lease, and had a ground lease expire with an unrelated third party landlord for which we opted not to exercise the renewal option.
NOTE 3 – LEASES
As lessor
Our operations consist of leasing or subleasing properties to our affiliate, Toys-Delaware under a master lease agreement.
In connection with the offering of the 8.500% senior secured notes due fiscal 2017 (the “Secured Notes”) on November 20, 2009 described in Note 5 entitled, “LONG-TERM DEBT”, we entered into the TRU Propco II Master Lease with Toys-Delaware under which Toys-Delaware continues to lease properties from us, including properties, which were formerly owned by MPO Holdings, LLC and are now held by TRU Propco II. The term of the TRU Propco II Master Lease was extended through January 31, 2030 except with respect to any property that is ground or space leased from a third party landlord to us with a term expiring prior to such date. Annual net base rents under the TRU Propco II Master Lease are scheduled to increase by 10% on February 1, 2015, February 1, 2020 and February 1, 2025. The TRU Propco II Master Lease continues to require Toys-Delaware to pay real estate taxes and certain other amounts. Future annual related party base rents may be reduced by payments we receive from Toys-Delaware as a result of an early termination of a lease, as set forth under the terms of the TRU Propco II Master Lease, or the successful execution of the sale of such properties by us to a third party.
Future base rents to be received under the TRU Propco II Master Lease as of February 2, 2013 are as follows:
(In thousands)
 
    Future Related Party    
Base Rents
2013
 
$
92,745

2014
 
92,565

2015
 
101,441

2016
 
101,128

2017
 
100,767

2018 and subsequent
 
1,354,899

Total
 
$
1,843,545

Leased retail properties under the TRU Propco II Master Lease consist of locations which are owned outright by us (“Owned Locations”) and locations which have buildings that are owned by us and land which is controlled through ground leases with unrelated third parties (“Ground Lease Locations”). For Owned Locations, the TRU Propco II Master Lease contains predetermined fixed escalations of the minimum rentals on February 1, 2015, February 1, 2020 and February 1, 2025. For Ground Lease Locations, the base rents consist of a net lease payment plus the rent on the underlying ground lease. The predetermined fixed escalations are applied separately. The net lease payments have predetermined fixed escalations on

33


February 1, 2015, February 1, 2020 and February 1, 2025 as agreed to in the TRU Propco II Master Lease. The escalation for the underlying ground leases occurs as provided in the respective lease agreements. For Ground Lease Locations, Toys-Delaware has a unilateral right to have us exercise the renewal option prior to the time the initial underlying lease term expires, so long as the renewed option is exercised prior to expiration of the TRU Propco II Master Lease. Deferred related party revenue was approximately $7 million and $1 million at February 2, 2013 and January 28, 2012, respectively.
The TRU Propco II Master Lease includes early termination options, which can be exercised by Toys-Delaware under specified conditions, including upon damage, destruction or condemnation of a specified percentage of the value or land area of the property.
As lessee
Our minimum rental commitments under non-cancelable operating leases to unaffiliated third parties having a term of more than one year as of February 2, 2013 are as follows:
(In thousands)
 
      Future Minimum      
Rentals (1)
2013
 
$
2,407

2014
 
2,242

2015
 
2,086

2016
 
1,772

2017
 
1,412

2018 and subsequent
 
1,371

Total
 
$
11,290

(1)
Excluded from the minimum rental commitments displayed above are approximately $83 million related to options to extend ground lease terms that are reasonably assured of being exercised, the balance of which predominantly relates to fiscals 2018 and thereafter.
We record operating leases on a straight-line basis over the lease term, which includes renewal options only if those options are specified in the lease agreement and if failure to exercise the renewal option imposes a significant economic penalty on us. For Ground Lease Locations, we include renewal options in the lease term through the estimated useful life of the owned building located on the property as failure to renew a ground lease during the estimated useful life of the building would result in forgoing an economic benefit given our significant capital investment at the inception of the lease to construct a new building. Substantially all of our leases include options that allow us to renew or extend the lease term beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease. Such terms and conditions include rental rates agreed upon at the inception of the lease that could represent below or above market rental rates later in the life of the lease, depending upon market conditions at the time of such renewal or extension. In addition, many leases include early termination options, which can be exercised by us under specified conditions, including upon damage, destruction or condemnation of a specified percentage of the value or land area of the property.
The difference between recognized rental expense and amounts payable under the leases is recorded as Deferred third party rent liabilities. Deferred third party rent liabilities are recorded in our Balance Sheets in the total amounts of $13 million and $14 million at February 2, 2013 and January 28, 2012, respectively.
NOTE 4 — COMMITMENTS AND CONTINGENCIES
Although we do not currently have material legal proceedings pending against us, we may be subject to various claims and contingencies related to lawsuits and real estate taxes, as well as commitments under contractual and other commercial obligations. We recognize liabilities for contingencies and commitments when a loss is probable and estimable. Refer to Note 3 entitled “LEASES” for minimum rental commitments under non-cancelable operating leases having a term of more than one year as of February 2, 2013.
TRU self-insures a substantial portion of our property insurance risks, in addition to third party insurance coverage. Accordingly, TRU bills Toys-Delaware, which leases our retail properties and is responsible for insuring our properties. As such, any property losses incurred by us would be reimbursed by Toys-Delaware.
NOTE 5 — LONG-TERM DEBT
As of February 2, 2013 and January 28, 2012, the carrying value of our debt was $718 million and $717 million, respectively, with fair values of approximately $767 million and $785 million, respectively. The fair value of our long-term debt was estimated using Level 1 inputs, which represent quoted market prices of our debt instrument.

34


8.500% senior secured notes, due fiscal 2017 ($718 million at February 2, 2013)
On November 20, 2009, we completed the offering of $725 million aggregate principal amount of senior secured 8.500% notes due fiscal 2017. The Secured Notes were issued at a discount of $10 million which resulted in the receipt of proceeds of $715 million. Investment funds or accounts advised by affiliates of KKR owned an aggregate of $5 million and $2 million of the Secured Notes as of February 2, 2013 and January 28, 2012, respectively. The Secured Notes are solely our obligation and are not guaranteed by TRU or Toys-Delaware. The Secured Notes are secured by the first priority security interests in all of our existing and future real estate properties and our interest under the TRU Propco II Master Lease between us as landlord and Toys-Delaware as tenant. Fees paid in connection with the sale of the Secured Notes were deferred and expensed over the life of the Secured Notes. At February 2, 2013, debt issuance costs for the Secured Notes were $17 million.
The indenture governing the Secured Notes contains covenants, including, among other things, covenants that restrict our ability to incur additional indebtedness, sell assets, enter into affiliate transactions, pay dividends or make other distributions, make other restricted payments and investments, or create liens. The indenture governing the Secured Notes also contains covenants that limit the ability of TRU to cause or permit Toys-Delaware to incur indebtedness or make restricted payments. These covenants are subject to a number of important qualifications and limitations. The Secured Notes may be redeemed, in whole or in part, at any time prior to December 1, 2013 at a price equal to 100% of the principal amount plus a “make-whole” premium, plus accrued and unpaid interest to the date of redemption. The Secured Notes will be redeemable, in whole or in part, at any time on or after December 1, 2013, at the specified redemption prices, plus accrued and unpaid interest, if any. In addition, prior to December 1, 2013, during each twelve month period commencing December 1, 2009, we may redeem up to 10% of the aggregate principal amount of the Secured Notes at a redemption price equal to 103% of the principal amount of the Secured Notes plus accrued and unpaid interest to the date of redemption. Following specified kinds of changes of control with respect to TRU or us, we will be required to offer to purchase the Secured Notes at a purchase price in cash equal to 101% of their principal amount, plus accrued and unpaid interest, if any to, but not including, the purchase date. Commencing on June 1, 2010, interest on the Secured Notes is payable in cash semi-annually in arrears through maturity on June 1 and December 1 of each year.
NOTE 6 — FAIR VALUE MEASUREMENTS
To determine the fair value of our assets and liabilities, we utilize the established fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Cash Equivalents
Cash equivalents include highly liquid investments with an original maturity of three months or less at acquisition. Due to the nature and short maturity of these investments, their carrying amount approximates fair value. Therefore, we have determined that our cash equivalents in their entirety are classified as Level 1 within the fair value hierarchy. We had a cash equivalents balance of $20 million at February 2, 2013. At January 28, 2012, we had no cash equivalents.
NOTE 7 — MEMBERS 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 fiscal 2012, we made cash distributions of $17 million in dividends. During fiscal 2011, we made cash distributions of $23 million and $4 million in dividends and return of capital, respectively. During fiscal 2010, we made cash distributions of $23 million and $5 million in dividends and return of capital, respectively.
During fiscal 2010, we received a capital contribution of approximately $1 million from Giraffe Junior Holdings, LLC.
Additionally, during fiscal 2010, we received a contribution of properties of approximately $1 million from our indirect parent, Toys-Delaware.
As described in Note 1 “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” during fiscal 2010, we recorded an approximate $2 million adjustment to the carrying value of net assets previously acquired on the Statement of Changes in Member’s Deficit to correct the initial carrying value of net assets contributed to us as part of the fiscal 2005 reorganization transactions.

35


NOTE 8 — RELATED PARTY TRANSACTIONS
Rental Revenues
Our rental revenues are derived from payments received under the TRU Propco II Master Lease we entered into with Toys-Delaware. The master lease agreement provides for Toys-Delaware to reimburse us for property related costs including, among others, real estate taxes and common area maintenance charges. Some of these costs are directly paid by Toys-Delaware and are recorded as both an expense and a tenant reimbursement. During fiscals 2012, 2011 and 2010, we earned related party Base rent revenues of $107 million, $106 million and $107 million, respectively. In addition, we recorded Tenant reimbursements of approximately $13 million during fiscals 2012, 2011 and 2010, respectively, under the TRU Propco II Master Lease. Refer to Note 3 entitled “LEASES” for further details regarding our rental arrangements.
Termination Payments
As discussed in Note 1 entitled SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, the TRU Propco II Master Lease requires Toys-Delaware to make a payment to us upon early termination of a lease, as set forth under the terms of the TRU Propco II Master Lease, or the successful execution of the sale of such properties by us 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. There were no termination payments required to be made in fiscals 2012, 2011 or 2010.
Management Service Fees
Toys-Delaware provides a majority of the centralized corporate functions, including accounting, human resources, legal, tax and treasury services to TRU, other affiliates and us under a Domestic Services Agreement (“Agreement”). The costs are based on a formula for each affiliate, as defined in the Agreement and are recorded in Other operating expenses in the Statements of Operations. The amount charged to us for these services was approximately $2 million during fiscals 2012, 2011 and 2010, respectively.
Transactions with the Sponsors
Investment funds or accounts advised by KKR owned an aggregate of $5 million and $2 million of the Secured Notes as of February 2, 2013 and January 28, 2012, respectively. See Note 5 entitled “LONG-TERM DEBT” for further details.
Capital contributions
In fiscal 2010, we received a capital contribution of approximately $1 million from Giraffe Junior Holdings, LLC.
Due from affiliate, net
As of February 2, 2013 and January 28, 2012, Due from affiliate, net of $5 million and $6 million, respectively, primarily represents real estate taxes, base rents and certain property reimbursements owed to us by Toys-Delaware.
NOTE 9 — RECENT ACCOUNTING PRONOUNCEMENTS
In February 2013, the FASB issued ASU No. 2013-04, “Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”). ASU 2013-04 provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations. The amendments in this ASU are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application is required. The adoption of ASU 2013-04 is not expected to have a material impact on our Financial Statements.


36


TOYS “R” US PROPERTY COMPANY II, LLC
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
February 2, 2013
 
 
 
 
 
INITIAL COST
TO COMPANY
 
 
 
GROSS AMOUNT AT
WHICH CARRIED
AT FEBRUARY 2, 2013
 
 
 
 
 
 
 
 
 
DESCRIPTION
 
ENCUMBRANCES
 
LAND
 
BUILDINGS &
IMPROVEMENTS
 
TOTAL
 
ADJUSTMENTS
TO INITIAL
COST
 
LAND
 
BUILDINGS &
IMPROVEMENTS
 
TOTAL
 
ACCUMULATED
DEPRECIATION
 
DATE OF
ACQUISITION
 
LIFE ON
WHICH
DEPRECIATION
IN LATEST
INCOME
STATEMENT IS
COMPUTED
BRU Oxnard, CA
 
 
1,703

 
2,357

 
4,060

 

 
1,703

 
2,357

 
4,060

 
(764
)
 
7/21/2005
 
0
to
50
YEARS
BRU Van Nuys, CA
 
 
3,390

 
2,942

 
6,332

 

 
3,390

 
2,942

 
6,332

 
(1,119
)
 
7/21/2005
 
0
to
50
YEARS
BRU Glendale(Arrowhead), AZ
 
 

 
4,800

 
4,800

 

 

 
4,800

 
4,800

 
(1,490
)
 
7/21/2005
 
0
to
50
YEARS
BRU Tucson, AZ
 
 
2,660

 
2,072

 
4,732

 

 
2,660

 
2,072

 
4,732

 
(569
)
 
7/21/2005
 
0
to
50
YEARS
BRU Sterling, VA
 
 
1,917

 
2,114

 
4,031

 

 
1,917

 
2,114

 
4,031

 
(520
)
 
7/21/2005
 
0
to
50
YEARS
BRU White Oak, MD
 
 
1,367

 
3,529

 
4,896

 

 
1,367

 
3,529

 
4,896

 
(799
)
 
7/21/2005
 
0
to
50
YEARS
BRU Milford, CT
 
 
2,234

 
3,164

 
5,398

 

 
2,234

 
3,164

 
5,398

 
(702
)
 
7/21/2005
 
0
to
50
YEARS
BRU Reno, NV
 
 
1,412

 
2,063

 
3,475

 

 
1,412

 
2,063

 
3,475

 
(433
)
 
7/21/2005
 
0
to
50
YEARS
BRU Fairview Heights, IL
 
 
1,072

 
2,986

 
4,058

 

 
1,072

 
2,986

 
4,058

 
(1,106
)
 
7/21/2005
 
0
to
50
YEARS
BRU Ogden, UT
 
 
621

 
2,187

 
2,808

 

 
621

 
2,187

 
2,808

 
(852
)
 
7/21/2005
 
0
to
50
YEARS
BRU Homewood, AL
 
 
2,596

 
2,808

 
5,404

 

 
2,596

 
2,808

 
5,404

 
(802
)
 
7/21/2005
 
0
to
50
YEARS
BRU Columbia, SC
 
 
3,491

 
1,175

 
4,666

 

 
3,491

 
1,175

 
4,666

 
(312
)
 
7/21/2005
 
0
to
50
YEARS
BRU Orland Park, IL
 
 
1,620

 
2,187

 
3,807

 

 
1,620

 
2,187

 
3,807

 
(883
)
 
7/21/2005
 
0
to
50
YEARS
BRU Northville, MI
 
 
2,052

 
3,271

 
5,323

 

 
2,052

 
3,271

 
5,323

 
(1,269
)
 
7/21/2005
 
0
to
50
YEARS
BRU Flint, MI
 
 
31

 
3,385

 
3,416

 

 
31

 
3,385

 
3,416

 
(1,145
)
 
7/21/2005
 
0
to
50
YEARS
BRU Auburn Hills, MI
 
 
2,529

 
2,412

 
4,941

 

 
2,529

 
2,412

 
4,941

 
(674
)
 
7/21/2005
 
0
to
50
YEARS
BRU Fort Wayne, IN
 
 
1,767

 
2,164

 
3,931

 

 
1,767

 
2,164

 
3,931

 
(556
)
 
7/21/2005
 
0
to
50
YEARS
BRU Syracuse, NY
 
 
1,408

 
3,824

 
5,232

 

 
1,408

 
3,824

 
5,232

 
(868
)
 
7/21/2005
 
0
to
50
YEARS
BRU Merrillville, IN
 
 
1,029

 
2,443

 
3,472

 

 
1,029

 
2,443

 
3,472

 
(549
)
 
7/21/2005
 
0
to
50
YEARS
BRU San Antonio(Ingram), TX
 
 

 
2,085

 
2,085

 

 

 
2,085

 
2,085

 
(847
)
 
7/21/2005
 
0
to
50
YEARS
BRU Dublin(Pleasanton), CA
 
 
21

 
5,335

 
5,356

 

 
21

 
5,335

 
5,356

 
(947
)
 
7/21/2005
 
0
to
50
YEARS
BRU Modesto, CA
 
 
916

 
3,382

 
4,298

 

 
916

 
3,382

 
4,298

 
(927
)
 
7/21/2005
 
0
to
50
YEARS
BRU Tigard, OR
 
 
25

 
6,165

 
6,190

 

 
25

 
6,165

 
6,190

 
(1,681
)
 
7/21/2005
 
0
to
50
YEARS
BRU Highland Ranch, CO
 
 
1,854

 
2,863

 
4,717

 

 
1,854

 
2,863

 
4,717

 
(717
)
 
7/21/2005
 
0
to
50
YEARS
BRU Vista, CA
 
 
2,006

 
2,423

 
4,429

 

 
2,006

 
2,423

 
4,429

 
(640
)
 
7/21/2005
 
0
to
50
YEARS
BRU Madison, WI
 
 
1,045

 
1,834

 
2,879

 
(186
)
 
1,045

 
1,648

 
2,693

 
(775
)
 
7/21/2005
 
0
to
50
YEARS
BRU Braintree, MA
 
 
5,096

 
1,985

 
7,081

 

 
5,096

 
1,985

 
7,081

 
(878
)
 
7/21/2005
 
0
to
50
YEARS
BRU Springfield, PA
 
 
6,345

 
3,927

 
10,272

 

 
6,345

 
3,927

 
10,272

 
(829
)
 
7/21/2005
 
0
to
50
YEARS
BRU Montgomeryville, PA
 
 
3,709

 
2,469

 
6,178

 

 
3,709

 
2,469

 
6,178

 
(487
)
 
7/21/2005
 
0
to
50
YEARS

37


 
 
 
 
INITIAL COST
TO COMPANY
 
 
 
GROSS AMOUNT AT
WHICH CARRIED
AT FEBRUARY 2, 2013
 
 
 
 
 
 
 
 
 
DESCRIPTION
 
ENCUMBRANCES
 
LAND
 
BUILDINGS &
IMPROVEMENTS
 
TOTAL
 
ADJUSTMENTS
TO INITIAL
COST
 
LAND
 
BUILDINGS &
IMPROVEMENTS
 
TOTAL
 
ACCUMULATED
DEPRECIATION
 
DATE OF
ACQUISITION
 
LIFE ON
WHICH
DEPRECIATION
IN LATEST
INCOME
STATEMENT IS
COMPUTED
TRU Riverside, CA
 
 
2,326

 
4,324

 
6,650

 

 
2,326

 
4,324

 
6,650

 
(2,863
)
 
7/21/2005
 
0
to
50
YEARS
TRU Bell Gardens, CA
 
 
1,032

 
3,964

 
4,996

 

 
1,032

 
3,964

 
4,996

 
(2,394
)
 
7/21/2005
 
0
to
50
YEARS
TRU Murrietta, CA
 
 
1,110

 
2,468

 
3,578

 

 
1,110

 
2,468

 
3,578

 
(1,340
)
 
7/21/2005
 
0
to
50
YEARS
TRU E. Mesa, AZ
 
 
1,142

 
3,142

 
4,284

 

 
1,142

 
3,142

 
4,284

 
(1,499
)
 
7/21/2005
 
0
to
50
YEARS
TRU Mission Viejo, CA
 
 
3,117

 
3,280

 
6,397

 

 
3,117

 
3,280

 
6,397

 
(1,449
)
 
7/21/2005
 
0
to
50
YEARS
TRU Reno, NV
 
 
950

 
3,044

 
3,994

 

 
950

 
3,044

 
3,994

 
(1,936
)
 
7/21/2005
 
0
to
50
YEARS
TRU Modesto, CA
 
 
1,141

 
3,647

 
4,788

 

 
1,141

 
3,647

 
4,788

 
(2,200
)
 
7/21/2005
 
0
to
50
YEARS
TRU Niles, IL
 
 
532

 
4,268

 
4,800

 

 
532

 
4,268

 
4,800

 
(2,664
)
 
7/21/2005
 
0
to
50
YEARS
TRU Bloomingdale, IL
 
 
736

 
5,015

 
5,751

 

 
736

 
5,015

 
5,751

 
(3,007
)
 
7/21/2005
 
0
to
50
YEARS
TRU Orland Park, IL
 
 
1,014

 
4,017

 
5,031

 

 
1,014

 
4,017

 
5,031

 
(2,646
)
 
7/21/2005
 
0
to
50
YEARS
TRU S. Milwaukee, WI
 
 
215

 
2,657

 
2,872

 
(306
)
 
215

 
2,351

 
2,566

 
(1,611
)
 
7/21/2005
 
0
to
50
YEARS
TRU Brookfield, WI
 
 
917

 
3,079

 
3,996

 

 
917

 
3,079

 
3,996

 
(1,949
)
 
7/21/2005
 
0
to
50
YEARS
TRU Davenport, IA
 
 
950

 
2,881

 
3,831

 

 
950

 
2,881

 
3,831

 
(1,406
)
 
7/21/2005
 
0
to
50
YEARS
TRU Racine, WI
 
 
703

 
2,679

 
3,382