LEASES

Adoption of Topic 842 "Leases"

On December 26, 2018, the Company adopted Topic 842, using the effective date method, recognizing and measuring all leases that existed as of December 26, 2018. The Company recorded a cumulative-effect adjustment as of December 26, 2018. Comparative periods are presented in accordance with ASC Topic 840 and do not include any retrospective adjustments to comparative periods to reflect the adoption of Topic 842. All leases that either (1) commenced, or (2) were modified or re-measured after December 26, 2018 are accounted for under Topic 842.

As a result of Topic 842, the Company recognized a ROU Asset of $205.2 million and a lease liability of $222.3 million on its consolidated balance sheet as of December 27, 2018. However, there was not a material impact on the Company’s consolidated statement of operations or consolidated statement of cash flows.

Nature of leases

The Company’s operations utilize property, facilities, equipment and vehicles owned by the Company or leased from others. Additionally, the Company has various contracts with vendors that have been determined to contain an embedded lease in accordance with Topic 842.

As of June 26, 2019, the Company had one lease that it had entered into, but had not yet commenced. The Company has no involvement with the construction or design of the underlying asset until lease commencement.

Building and facility leases

Buildings and facilities leased from others are primarily for restaurants and support facilities. The majority of the Company’s leases are classified as operating leases; however, the Company currently has three finance leases.

Restaurants are operated under lease arrangements that generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues in excess of a defined amount. Additionally, a number of the Company’s leases have payments, which increase at pre-determined dates based on the change in the consumer price index. For all leases the Company also reimburses the landlord based on actual common area maintenance, property tax and insurance costs, making them variable consideration and excluding them from the calculations of the ROU Asset and lease liability.

The initial terms of land and restaurant building leases are generally 20 years, exclusive of options to renew. These leases typically have four 5-year renewal options, which have generally been excluded in the calculation of the ROU Asset and lease liability, as they are not considered reasonably certain to be exercised, unless (1) the renewal has already occurred as of the time of adoption of Topic 842, or (2) there have been significant leasehold improvements that have a useful life that extend past the original lease term. Furthermore, there are no residual value guarantees and no restrictions imposed by the lease.

During the thirteen and twenty-six weeks ended June 26, 2019, the Company reassessed the lease terms on three restaurants due to the addition of significant leasehold improvements with useful lives that extend past the current lease expiration. This resulted in an additional $1.2 million of ROU Asset and lease liability, which will be recognized over the new lease term. The reassessment did not have any impact on the original lease classification. Additionally, as the Company adopted all practical expedients, no reallocation between lease and non-lease components was necessary.

The Company also subleases facilities to certain franchisees and other non-related parties which are also considered operating leases. Sublease income also includes contingent rental income based on net revenues. The vast majority of these leases have rights to extend terms via fixed increases. However, none of these leases have early termination rights, the right to purchase the premises or any residual value guarantees. The Company does not have any related party leases.

Equipment

Leases of equipment primarily consist of restaurant equipment, copiers and vehicles. These leases are fixed payments with no variable component. Additionally, no optional renewal periods have been included in the calculation of the ROU Asset, there are no residual value guarantees and no restrictions imposed.

Significant Assumptions and Judgments

In applying the requirements of Topic 842 the Company made significant assumptions and judgments related to determination of whether a contract contains a lease and the discount rate used for the lease.

In determining if any of the Company’s contracts contain a lease the Company made assumptions and judgments related to its ability to direct the use of any assets stated in the contract and the likelihood of renewing any short-term contracts for a period extending past twelve months.

The Company also made significant assumptions and judgments in determining an appropriate discount rate for property leases. These included using a consistent discount rate for a portfolio of leases entered into at varying dates, using the full 20 year term of the lease, excluding any options, and using the total minimum lease payments. The Company utilized a third party valuation firm in determining the discount rate, based on the above assumptions. For all other leases, the Company used the discount rate implicit in the lease, or the Company’s incremental borrowing rate.

As the Company is adopting the practical expedient not to separate lease and non-lease components, no significant assumptions or judgments were necessary in allocating consideration between these components, for all classes of underlying assets.

The following table presents the Company’s total lease cost, disaggregated by underlying asset (in thousands):



	Thirteen Weeks Ended June 26, 2019					Twenty-Six Weeks Ended June 26, 2019
	Property Leases		Equipment Leases	Total		Property Leases		Equipment Leases	Total
Finance lease cost:
Amortization of right-of-use assets	3		—	3		9		—	9
Interest on lease liabilities	7		—	7		15		—	15
Operating lease cost	6,585		327	6,912		13,187		654	13,841
Short-term lease cost	—		9	9		—		17	17
Variable lease cost	127		27	154		224		98	322
Sublease income	(511	)	—	(511	)	(901	)	—	(901	)
Total lease cost	6,211		363	6,574		12,534		769	13,303

The following table presents the Company’s total lease cost on the Condensed Consolidated Statement of Income (in thousands):



	Thirteen Weeks Ended June 26, 2019	Twenty-Six Weeks Ended June 26, 2019
Lease cost – Occupancy and other operating expenses	6,256	12,659
Lease cost – General & administrative	114	233
Lease cost – Depreciation and amortization	3	9
Lease cost – Interest expense	7	15
Lease cost - Closed-store reserve	194	387
Total lease cost	6,574	13,303

During the twenty-six weeks ended June 26, 2019, the Company had the following cash and non-cash activities associated with its leases (in thousands):



	Twenty-Six Weeks Ended June 26, 2019
	Property Leases		Equipment Leases		Total

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	12,361		654		13,015
Financing cash flows used for finance leases	53		—		53

Non-cash investing and financing activities:
Operating lease ROU Assets obtained in exchange for lease liabilities:
Operating lease ROU Assets	4,995		—		4,995

Operating lease ROU Assets obtained and liabilities incurred as a result of adoption of ASC 842:
Operating lease ROU Assets	200,555		4,668		205,223
Operating lease liabilities	217,615		4,668		222,283

Other Information
Weighted-average remaining lease term—finance leases	3.33		—
Weighted-average remaining lease term—operating leases	12.23		3.55
Weighted-average discount rate—finance leases	11.1	%	—
Weighted-average discount rate—operating leases	4.38	%	3.98	%

Information regarding the Company’s minimum future lease obligations as of June 26, 2019 is as follows (in thousands):



	Finance			Operating Leases
For the Years Ending	Minimum Lease Payments			Minimum Lease Payments			Minimum Sublease Income
December 25, 2019	$	27		$	13,263		$	695
December 30, 2020	54			26,387			1,108
December 29, 2021	54			26,050			1,078
December 28, 2022	45			25,043			1,001
December 28, 2023	—			22,634			989
Thereafter	—			154,940			2,612
Total	$	180		$	268,317		$	7,483
Less: imputed interest (3.96% to 11.1%)	(49		)	(50,978		)
Present value of lease obligations	131			217,339
Less: current maturities	(31		)	(18,727		)
Noncurrent portion	$	100		$	198,612

Information regarding the Company’s minimum future lease obligations at December 26, 2018 is as follows, under ASC 840 (in thousands):



	Capital Leases			Operating Leases
For the Years Ending	Minimum Lease Payments			Minimum Lease Payments		Minimum Sublease Income
December 25, 2019	$	95		$	25,388	$	1,443
December 30, 2020	54			24,437		1,108
December 29, 2021	54			23,342		1,078
December 28, 2022	45			22,338		1,001
December 28, 2023	—			20,634		989
Thereafter	—			150,342		2,612
Total	$	248		$	266,481	$	8,231
Less: imputed interest (11.0% to 11.1%)	(64		)
Present value of capital lease obligations	184
Less: current maturities	(68		)
Noncurrent portion	$	116

Short-Term Leases

The Company has multiple short-term leases, which have terms of less than 12 months, and thus were excluded from the recognition requirements of Topic 842. The Company has recognized these lease payments in its consolidated statement of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

Lessor

The Company is a lessor for certain property, facilities and equipment owned by the Company and leased to others, principally franchisees, under non-cancelable leases with initial terms ranging from three to 20 years. These lease agreements generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues. All leases are considered operating leases.

For the leases in which the Company is the lessor, there are options to extend the lease. However, there are no terms and conditions to terminate the lease, no right to purchase premises and no residual value guarantees. Additionally, there are no related party leases.

For the thirteen and twenty-six weeks ended June 26, 2019, the Company received $0.2 million and $0.3 million of lease income, respectively, from company-owned locations.