Leases

12 Months Ended

Dec. 31, 2020

Leases

Leases

3. Leases

The Company leases corporate offices, a distribution center, billboards and certain equipment. As all franchisees are independently owned and operated, there are no leases recognized for any offices used by the Company’s franchisees. The leases have remaining lease terms ranging from less than a year up to 13 years, some of which include one or more options to renew. Of these renewal options, the Company determined that none are reasonably certain to be exercised. All the Company’s material leases are classified as operating leases.

The Company has a lease for its corporate headquarters office building (the “Headquarters Lease”) that expires in 2028. The Company may, at its option, extend the Headquarters Lease for two renewal periods of 10 years. Under the terms of the Headquarters Lease, the Company pays an annual base rent, which escalates 3% each year, including the first optional renewal period. The second optional renewal period resets to fair market rental value, and the rent escalates 3% each year until expiration. The Company pays for insurance, property taxes and operating expenses of the leased space. The Headquarters Lease is the Company’s only significant lease.

The Company acts as the lessor for four sublease agreements on its corporate headquarters, consisting solely of operating leases, each of which include a renewal option for the lessee to extend the length of the lease. Renewal options for two of the sublease agreements are contingent upon renewal of the Headquarters Lease, which is not reasonably certain to be exercised in 2028. As such, the Company determined these sublease renewal options are not reasonably certain to be exercised. Renewal options for the remaining two sublease agreements have already been exercised and will expire before the end of the corporate headquarters lease in 2028.

Lease Impairment

During the third quarter of 2020, the Company began executing on a plan to both refresh its corporate headquarters and sublease space made available through the refresh. As a result, the Company changed its asset grouping for its headquarters ROU asset to separate the portion that it intends to sublease from the portion it will continue to occupy and

performed an impairment test on the portion it intends to sublease. Based on a comparison of undiscounted cash flows to the ROU asset, the Company determined that the asset was impaired, driven largely by the difference between the existing lease rate on the Company’s corporate headquarters and expected sublease rates available in the market. This resulted in an impairment charge of $7.9 million and a reduction to basic earnings per share of $0.20 per share, for the year ended December 31, 2020, which reflects the excess of the ROU asset over its fair value.

The Company used its Senior Secured Credit Facility interest rate to extrapolate a rate for each of its leases to calculate the present value of the lease liability and right-of-use asset. A summary of the Company’s lease cost is as follows (in thousands, except for weighted-averages):

	Year Ended December 31,
	2020			2019
Lease Cost
Operating lease cost (a)	$	12,085		$	12,259
Sublease income		(1,434)			(1,508)
Short-term lease cost (b)		5,959			6,495
Total lease cost	$	16,610		$	17,246
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from operating leases		8,520			8,507
Weighted-average remaining lease term in years - operating leases		7.4			8.4
Weighted-average discount rate - operating leases		6.3	%		6.3	%

(a) Includes approximately $3.6 million and $3.7 million of taxes, insurance and maintenance for the years ended December 31, 2020 and 2019, respectively.

(b) Includes expenses associated with short-term leases of billboard advertisements and is included in “Marketing Funds expenses” on the Consolidated Statements of Income for the years ended December 31, 2020 and 2019.

Maturities under non-cancellable leases were as follows (in thousands):

	Rent Payments		Sublease Receipts		Total Cash Outflows
Year ending December 31:
2021	$	9,014		(895)	$	8,119
2022		9,003		(1,200)		7,803
2023		9,174		(1,311)		7,863
2024		9,439		(1,273)		8,166
2025		9,717		(331)		9,386
Thereafter		24,469		(388)		24,081
Total lease payments	$	70,816	$	(5,398)	$	65,418
Less: imputed interest		14,850
Present value of lease liabilities	$	55,966