Leases

8 Months Ended

Sep. 08, 2020

Leases [Abstract]

Leases

LeasesThe Company's material leases consist of restaurant locations and its executive offices with expiration dates through 2044. In general, the leases have remaining terms of 1-20 years, most of which include options to extend the leases for additional five-

year periods. The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determines that it is reasonably certain of exercising the option at inception or when a triggering event occurs.

The Company has subleased certain properties to other third parties where the Company remains primarily liable to the landlord for the performance of all obligations in the event that the sublessee does not perform its obligations under the lease. As a result of the sublease arrangements, future rental commitments under operating leases will be offset by sublease amounts to be paid by the sublessee. In general, the terms of the sublease are similar to the terms of the master lease.

The components of lease cost for the twelve and thirty-six weeks ended September 8, 2020 were as follows (in thousands):

	Classification	Twelve Weeks Ended September 8, 2020		Thirty-Six Weeks Ended September 8, 2020
Operating lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other, Pre-opening costs, Restaurant closure charges, net and General and administrative	$	9,251	$	28,060
Finance lease cost:
Amortization of right of use assets	Depreciation and amortization	33		123
Interest on lease liabilities	Interest expense	5		23
Short-term lease cost	Occupancy and other operating expenses	71		238
Variable lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other and Restaurant closure charges, net	440		1,097
Sublease income	Franchise sublease and other income	(1,716)		(4,988)
Total lease cost		$	8,084	$	24,553

The components of lease cost for the twelve and thirty-six weeks ended September 10, 2019 were as follows (in thousands):

	Classification	Twelve Weeks Ended September 10, 2019		Thirty-Six Weeks Ended September 10, 2019
Operating lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other, Pre-opening costs, Restaurant closure charges, net and General and administrative	$	8,792	$	26,196
Finance lease cost:
Amortization of right of use assets	Depreciation and amortization	86		329
Interest on lease liabilities	Interest expense	21		72
Short-term lease cost	Occupancy and other operating expenses	53		231
Variable lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other and Restaurant closure charges, net	444		1,282
Sublease income	Franchise sublease and other income	(1,125)		(3,261)
Total lease cost		$	8,271	$	24,849

Supplemental balance sheet information related to the Company's operating and finance leases (noting the financial statement caption each is included with) as of September 8, 2020 and December 31, 2019 was as follows (in thousands):

	September 8, 2020		December 31, 2019
Operating lease assets:
Operating lease right-of-use assets	$	250,154	$	258,278
Operating lease liabilities:
Current portion of operating lease liabilities	$	20,116	$	17,848
Operating lease liabilities, excluding current portion	253,121		257,361
Total operating lease liabilities	$	273,237	$	275,209
Finance lease assets:
Buildings under finance leases	$	441	$	871
Accumulated depreciation	(240)		(334)
Finance lease assets, net	$	201	$	537
Finance lease obligations:
Current portion of finance lease obligations and other debt	$	138	$	162
Long-term debt, finance lease obligations and other debt, excluding current portion, net	70		412
Total finance lease obligations	$	208	$	574

Weighted Average Remaining Lease Term (in years)	September 8, 2020
Operating leases	12.5
Finance leases	2.1

Weighted Average Discount Rate	September 8, 2020
Operating leases	6.58	%
Finance leases	10.44	%

Supplemental cash flow information related to leases was as follows (in thousands):

	Thirty-Six Weeks Ended September 8, 2020		Thirty-Six Weeks Ended September 10, 2019
Cash paid for amounts in the measurement of lease liabilities:
Operating cash flows used for operating leases	$	25,529	$	22,617
Operating cash flows used for finance leases	$	23	$	72
Financing cash flows used for finance leases	$	119	$	353

The estimated future lease payments as of September 8, 2020, are as follows (in thousands):

	Finance Lease Liabilities		Operating Lease Liabilities		Operating Subleases		Net Lease Commitments
2020	$	38	$	9,957	$	(1,562)	$	8,433
2021	138		39,240		(6,140)		33,238
2022	19		41,029		(6,678)		34,370
2023	17		35,892		(6,005)		29,904
2024	16		30,076		(5,358)		24,734
Thereafter	4		253,707		(59,927)		193,784
Total lease payments	$	232	$	409,901	$	(85,670)	$	324,463
Amounts representing interest	(24)		(136,664)				(136,688)
Present value of lease obligations	$	208	$	273,237			$	187,775

During the thirty-six weeks ended September 8, 2020, the Company entered into one sale-leaseback arrangement with a third party private investor during the first quarter of 2020. The sale-leaseback transaction does not provide for any continuing involvement by the Company other than a normal lease where the Company intends to use the property during the lease term. The lease has been accounted for as an operating lease. The net proceeds from the transaction totaled approximately $1.4 million. Under the arrangement, the Company sold the land and building of an existing restaurant and leased it back for a term of 20 years. The sale of this property resulted in a gain of approximately $0.6 million which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statements of comprehensive income (loss).

During the thirty-six weeks ended September 10, 2019, the Company entered into three sale-leaseback arrangements with third party private investors, with two arrangements occurring during the first quarter of 2019 and one during the second quarter of 2019. These sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The leases have been accounted for as operating leases. The net proceeds from the transactions totaled approximately $12.7 million. Under two of the arrangements, the Company sold the land and buildings related to restaurants constructed during 2018 and leased them back for a term of 20 years. Under one of the arrangements, the Company sold the land related to a restaurant constructed during 2018 and leased it back for a term of 20 years. The sale of these properties resulted in a net loss of approximately $0.2 million which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statements of comprehensive income (loss). The assets sold were included in assets held for sale as of January 1, 2019.

During the twelve weeks ended June 16, 2020, following the sale of a company-operated restaurant to a franchisee, the related lease was assigned to the franchisee. The Company is a guarantor on the lease which has a remaining term of 19 years, expiring in 2039, and remaining lease payments total approximately $1.6 million. The Company would remain a guarantor of the lease in the event the lease is extended for any established renewal periods. As of September 8, 2020, the Company does not anticipate any material defaults under the forgoing lease, and therefore, no liability has been provided.

Additionally, another Del Taco franchisee has a direct sublease with a third party where the Company is a guarantor on the sublease. The lease has a remaining term of 11 years, expiring in 2031, and remaining lease payments total approximately $1.6 million. The Company would remain a guarantor of the lease in the event the lease is extended for any established renewal periods. In 2019, the franchisee defaulted on the lease payments. The Company had a liability of $0.04 million and $0.08 million as of September 8, 2020 and December 31, 2019, respectively, representing the estimated payments that the Company will be liable for until it is able to find a new franchisee or convert the restaurant to a company-operated restaurant.

During the twelve weeks ended June 16, 2020, in response to the COVID-19 pandemic, the Company negotiated temporary deferrals of certain rent payments until future periods. As permitted by recent FASB staff guidance, the Company elected to not evaluate whether these concessions were considered lease modifications and adopted a policy to not account for these concessions as lease modifications. As such, the Company continued to account for the related lease liabilities and right-of-use assets using the rights and obligations of the existing leases and included $1.3 million related to temporary rent payment

deferrals in accounts payable in the consolidated balance sheet as of June 16, 2020. The Company repaid these deferrals during the

Leases

LeasesThe Company's material leases consist of restaurant locations and its executive offices with expiration dates through 2044. In general, the leases have remaining terms of 1-20 years, most of which include options to extend the leases for additional five-

year periods. The lease term is generally the minimum noncancelable period of the lease. The Company does not include option periods unless the Company determines that it is reasonably certain of exercising the option at inception or when a triggering event occurs.

The Company has subleased certain properties to other third parties where the Company remains primarily liable to the landlord for the performance of all obligations in the event that the sublessee does not perform its obligations under the lease. As a result of the sublease arrangements, future rental commitments under operating leases will be offset by sublease amounts to be paid by the sublessee. In general, the terms of the sublease are similar to the terms of the master lease.

The components of lease cost for the twelve and thirty-six weeks ended September 8, 2020 were as follows (in thousands):

	Classification	Twelve Weeks Ended September 8, 2020		Thirty-Six Weeks Ended September 8, 2020
Operating lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other, Pre-opening costs, Restaurant closure charges, net and General and administrative	$	9,251	$	28,060
Finance lease cost:
Amortization of right of use assets	Depreciation and amortization	33		123
Interest on lease liabilities	Interest expense	5		23
Short-term lease cost	Occupancy and other operating expenses	71		238
Variable lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other and Restaurant closure charges, net	440		1,097
Sublease income	Franchise sublease and other income	(1,716)		(4,988)
Total lease cost		$	8,084	$	24,553

The components of lease cost for the twelve and thirty-six weeks ended September 10, 2019 were as follows (in thousands):

	Classification	Twelve Weeks Ended September 10, 2019		Thirty-Six Weeks Ended September 10, 2019
Operating lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other, Pre-opening costs, Restaurant closure charges, net and General and administrative	$	8,792	$	26,196
Finance lease cost:
Amortization of right of use assets	Depreciation and amortization	86		329
Interest on lease liabilities	Interest expense	21		72
Short-term lease cost	Occupancy and other operating expenses	53		231
Variable lease cost	Occupancy and other operating expenses, Occupancy and other - franchise subleases and other and Restaurant closure charges, net	444		1,282
Sublease income	Franchise sublease and other income	(1,125)		(3,261)
Total lease cost		$	8,271	$	24,849

Supplemental balance sheet information related to the Company's operating and finance leases (noting the financial statement caption each is included with) as of September 8, 2020 and December 31, 2019 was as follows (in thousands):

	September 8, 2020		December 31, 2019
Operating lease assets:
Operating lease right-of-use assets	$	250,154	$	258,278
Operating lease liabilities:
Current portion of operating lease liabilities	$	20,116	$	17,848
Operating lease liabilities, excluding current portion	253,121		257,361
Total operating lease liabilities	$	273,237	$	275,209
Finance lease assets:
Buildings under finance leases	$	441	$	871
Accumulated depreciation	(240)		(334)
Finance lease assets, net	$	201	$	537
Finance lease obligations:
Current portion of finance lease obligations and other debt	$	138	$	162
Long-term debt, finance lease obligations and other debt, excluding current portion, net	70		412
Total finance lease obligations	$	208	$	574

Weighted Average Remaining Lease Term (in years)	September 8, 2020
Operating leases	12.5
Finance leases	2.1

Weighted Average Discount Rate	September 8, 2020
Operating leases	6.58	%
Finance leases	10.44	%

Supplemental cash flow information related to leases was as follows (in thousands):

	Thirty-Six Weeks Ended September 8, 2020		Thirty-Six Weeks Ended September 10, 2019
Cash paid for amounts in the measurement of lease liabilities:
Operating cash flows used for operating leases	$	25,529	$	22,617
Operating cash flows used for finance leases	$	23	$	72
Financing cash flows used for finance leases	$	119	$	353

The estimated future lease payments as of September 8, 2020, are as follows (in thousands):

	Finance Lease Liabilities		Operating Lease Liabilities		Operating Subleases		Net Lease Commitments
2020	$	38	$	9,957	$	(1,562)	$	8,433
2021	138		39,240		(6,140)		33,238
2022	19		41,029		(6,678)		34,370
2023	17		35,892		(6,005)		29,904
2024	16		30,076		(5,358)		24,734
Thereafter	4		253,707		(59,927)		193,784
Total lease payments	$	232	$	409,901	$	(85,670)	$	324,463
Amounts representing interest	(24)		(136,664)				(136,688)
Present value of lease obligations	$	208	$	273,237			$	187,775

During the thirty-six weeks ended September 8, 2020, the Company entered into one sale-leaseback arrangement with a third party private investor during the first quarter of 2020. The sale-leaseback transaction does not provide for any continuing involvement by the Company other than a normal lease where the Company intends to use the property during the lease term. The lease has been accounted for as an operating lease. The net proceeds from the transaction totaled approximately $1.4 million. Under the arrangement, the Company sold the land and building of an existing restaurant and leased it back for a term of 20 years. The sale of this property resulted in a gain of approximately $0.6 million which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statements of comprehensive income (loss).

During the thirty-six weeks ended September 10, 2019, the Company entered into three sale-leaseback arrangements with third party private investors, with two arrangements occurring during the first quarter of 2019 and one during the second quarter of 2019. These sale-leaseback transactions do not provide for any continuing involvement by the Company other than normal leases where the Company intends to use the property during the lease term. The leases have been accounted for as operating leases. The net proceeds from the transactions totaled approximately $12.7 million. Under two of the arrangements, the Company sold the land and buildings related to restaurants constructed during 2018 and leased them back for a term of 20 years. Under one of the arrangements, the Company sold the land related to a restaurant constructed during 2018 and leased it back for a term of 20 years. The sale of these properties resulted in a net loss of approximately $0.2 million which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statements of comprehensive income (loss). The assets sold were included in assets held for sale as of January 1, 2019.

During the twelve weeks ended June 16, 2020, following the sale of a company-operated restaurant to a franchisee, the related lease was assigned to the franchisee. The Company is a guarantor on the lease which has a remaining term of 19 years, expiring in 2039, and remaining lease payments total approximately $1.6 million. The Company would remain a guarantor of the lease in the event the lease is extended for any established renewal periods. As of September 8, 2020, the Company does not anticipate any material defaults under the forgoing lease, and therefore, no liability has been provided.

Additionally, another Del Taco franchisee has a direct sublease with a third party where the Company is a guarantor on the sublease. The lease has a remaining term of 11 years, expiring in 2031, and remaining lease payments total approximately $1.6 million. The Company would remain a guarantor of the lease in the event the lease is extended for any established renewal periods. In 2019, the franchisee defaulted on the lease payments. The Company had a liability of $0.04 million and $0.08 million as of September 8, 2020 and December 31, 2019, respectively, representing the estimated payments that the Company will be liable for until it is able to find a new franchisee or convert the restaurant to a company-operated restaurant.

During the twelve weeks ended June 16, 2020, in response to the COVID-19 pandemic, the Company negotiated temporary deferrals of certain rent payments until future periods. As permitted by recent FASB staff guidance, the Company elected to not evaluate whether these concessions were considered lease modifications and adopted a policy to not account for these concessions as lease modifications. As such, the Company continued to account for the related lease liabilities and right-of-use assets using the rights and obligations of the existing leases and included $1.3 million related to temporary rent payment

deferrals in accounts payable in the consolidated balance sheet as of June 16, 2020. The Company repaid these deferrals during the