Leases

We adopted ASU 2016-02 in the first quarter of 2019 by utilizing the modified retrospective transition method through a cumulative-effect adjustment in the beginning of the first quarter of 2019. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that existed prior to the adoption of the new standard. We made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet. We have elected the practical expedient the Company will not separate a qualifying contract into its lease and non-lease components. The Company recognizes those lease payments in the Consolidated Statements of Operation on a straight-line basis over the lease term. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases with original terms over 12 months where the Company is the lessee.

Upon adoption of Topic 842 during the first quarter of 2019 we recognized ROU of $161.6 million, and lease liabilities of $218.0 million, and recorded a cumulative effect adjustment to increase retained earnings of $8.7 million, due to build-to-suit leases and prior deferred gains on sales leaseback transactions.

We currently lease all of our restaurants. We lease certain facilities under noncancelable operating leases and have several obligations under finance leases, with terms expiring between 2019 and 2039. The operating and finance leases have renewal options ranging from 5 to 20 years, which are exercisable at our option. In addition, certain leases contain escalation clauses based on a fixed percentage increase and provisions for contingent rentals based on a percentage of gross revenues, as defined. The majority of our leases provide for minimum annual rents with some containing percentage-of-sales rent provisions, against which the minimum rent may be applied. The majority of our leases also provide for rent escalation clauses, contingent rental expense, and/or tenant improvement allowances. Minimum rental payments under operating leases are recognized on a straight-line basis over the expected term of the lease, which includes optional renewal periods that are reasonably certain to be exercised and where failure to exercise such renewal options would result in an economic penalty to us.

For the Company's operating and finance leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments include how the Company determines (i) the discount rate it uses to discount the unpaid lease payments to present value, (ii) lease term and (iii) lease payments. Topic 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate ("IBR"). Generally, the Company cannot determine the interest rate implicit in the lease and therefore uses the IBR as a discount rate for its leases. The IBR reflects the rate of interest the Company would pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To estimate our specific incremental borrowing rates over various tenors (ranging from 3-year through 30-years), a comparable market yield curve consistent with our credit quality was calibrated to our outstanding debt instruments. The lease term for all of the Company's leases includes the noncancellable period of the lease plus any additional periods covered by an option to extend the lease that is reasonably certain to be executed by the Company. Lease payments included in the measurement of the lease liability comprise fixed payments owed over the lease term, fixed non-lease component payments, variable lease payments that depend on an index or rate, and the renewal option if it is reasonably certain the Company will exercise the option. As part of the lease agreements the Company is also responsible for payments regarding non-lease components (common area maintenance, operating expenses, etc.) and most of these payments are variable costs; however, some leases have fixed operating or common area maintenance expenses so these leases with fixed non-lease component payments were included as part of the lease liabilities.

The ROU asset is initially measured at cost, which comprises the initial amount of lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For the Company's operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, and adjusted for any prepaid or accrued lease payments, less the unamortized balance of lease incentives received.

Operating leases are included in operating lease ROU assets, current portion of operating leases, and operating lease liabilities on our Consolidated Statements of Operation. Finance leases are included in buildings and improvements and furniture, fixtures, and equipment, current portion of finance leases, and finance lease on our Consolidated Statements of Operation.

Lease Position

The table below presents the lease-related assets and liabilities recorded on the balance sheet:



		As of
(Amounts in thousands)	Classification	June 25, 2019
Assets
Operating leases⁽¹⁾	Operating lease right-of-use assets	$	166,204
Finance leases⁽²⁾	Buildings and improvements; Furniture, fixtures, and equipment	8,259
Total leased assets		$	174,463
Liabilities
Current
Operating	Current portion of operating leases	$	27,030
Finance	Current portion of finance leases	1,028
Noncurrent
Operating	Noncurrent operating leases	198,264
Finance	Finance leases	7,157
Total lease liabilities		$	233,479


(1)	Operating lease right-of-use assets, presented net of accumulated amortization of $3.0 million as of June 25, 2019.


(2)	Finance lease assets accumulated amortization was $0.4 million as of June 25, 2019.

Lease Costs

The table below presents certain information related to the lease costs for finance and operating leases:



(Amounts in thousands)	Classification	13 Weeks Ended June 25, 2019		26 Weeks Ended June 25, 2019
Operating lease cost⁽¹⁾	Restaurant operating expenses	$	8,955	$	17,704
Finance lease cost
Amortization of leased assets	Depreciation and amortization	194		388
Interest on lease liabilities	Interest expense	230		435
Net lease cost		$	9,379	$	18,527


(1)	Includes short-term lease and variable lease costs of $0.2 million and $0.9 million for the13 weeks ended June 25, 2019, respectively and $0.5 million and $1.8 million for the 26 weeks ended June 25, 2019, respectively.

Lease Maturities

The following table presents aggregate lease maturities as of June 25, 2019:



	As of
	June 25, 2019
(Amounts in thousands)	Operating Leases			Finance Leases			Total
2019	$	13,633		$	519		$	14,152
2020	34,055			1,280			35,335
2021	34,259			1,312			35,571
2022	34,844			1,329			36,173
2023	34,727			1,353			36,080
Thereafter	379,809			9,698			389,507
Total minimum lease payments	531,327			15,491			546,818
Less: amount of lease payments representing interest	(306,033		)	(7,306		)	(313,339		)
Present value of future minimum lease payments	225,294			8,185			233,479
Less: current obligations under leases	(27,030		)	(1,028		)	(28,058		)
Long-term lease obligations	$	198,264		$	7,157		$	205,421

Future minimum payments due under financing lease and capital lease obligations for existing restaurants and commitments for restaurants whose development had not yet commenced as of December 25, 2018, under Accounting Standard Codification Topic 840, the predecessor to Topic 842, are as follows:



	As of
(Amounts in thousands)	December 25, 2018
2019	$	1,714
2020	1,812
2021	1,858
2022	1,887
2023	1,814
Thereafter	6,428
Total minimum lease payments	$	15,513
Less imputed interest	(1,971		)
Present value of future lease commitments	13,542
Less current maturities	(1,714		)
Obligations under capital and financing leases, net of current maturities	$	11,828

Future minimum lease payments under noncancelable operating leases include renewal option periods for certain leases when such option periods are included for purposes of calculating straight-line rents. At December 25, 2018, future minimum rentals for each of the next five years and thereafter, and in total, are as follows: ໿



	As of
(Amounts in thousands)	December 25, 2018
2019	$	32,357
2020	35,070
2021	35,398
2022	36,029
2023	34,871
Thereafter	365,864
Total minimum lease payments	$	539,589

At June 25, 2019, the Company has entered into noncancellable operating leases for 6 additional restaurant locations. These leases will commence subsequent to June 25, 2019 and, therefore, are not recognized as of June 25, 2019. The fixed payments due on an undiscounted basis over the lease term is $72.0 million. The Company will assess the lease classification at the lease commencement date.

Other Information

The following table presents the weighted average remaining lease term and discount rate:



		As of
		June 25, 2019
Weighted-average remaining lease term
Operating leases		14.8 years
Finance leases		12.2 years
Weighted-average discount rate
Operating leases		11.8%
Finance leases		11.3%

The following table presents other information related to our operating and finance leases:



(Amounts in thousands)	26 Weeks Ended June 25, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,367
Operating cash flows from finance leases	—
Financing cash flows from finance leases	625
Leased assets obtained in exchange for lease obligations⁽¹⁾
Operating leases	15,010
Finance leases	—


(1)	Amounts disclosed for leased assets obtained in exchange for lease obligations include amounts added to the carrying amount of leased assets resulting from lease modifications and reassessments.