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Leases

9 Months Ended

Sep. 29, 2021

11. LEASES

Nature of leases

The Company’s operations utilize property, facilities, equipment and vehicles 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 September 29, 2021, the Company had one lease that it had entered into, but had not yet commenced. The Company does not have control of the property until lease commencement.

Building and facility leases

The majority of the Company’s building and facilities leases are classified as operating leases; however, the Company currently has two facilities and nine equipment leases that are classified as 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 for non-lease components, or items that are not considered components of a contract, such as CAM, property tax and insurance costs. While the Company determined not to separate lease and non-lease components, these payments are based on actual 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 had 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 thirty-nine weeks ended September 29, 2021, the Company reassessed the lease terms on four and 16 restaurants, respectively, due to certain triggering events, such as the addition of significant leasehold improvements with useful lives that extend past the current lease expiration, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $2.6 million and $13.8 million of ROU asset and lease liabilities for the thirteen and thirty-nine weeks ended September 29, 2021, respectively, were recognized and will be amortized over the new lease term. During the thirteen and thirty-nine weeks ended September 23, 2020, the Company reassessed the lease terms on two and nine restaurants, respectively, due to the addition of significant leasehold improvements with useful lives that extend past the current lease expiration, the decision to terminate a lease or the decision to renew leases. This reassessment resulted in an additional $0.3 million and $2.0 million of ROU asset and lease liability for the thirteen and thirty-nine weeks ended September 23, 2020, respectively, which will be recognized over the new lease term. The reassessments did not have any impact on the original lease classification. Additionally, as the Company adopted all practical expedients available under Topic 842, 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 rental 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.

During the thirty-nine weeks ended September 29, 2021, the Company determined that the carrying value of ROU assets at two restaurants was not recoverable. As a result, the Company recorded a $0.4 million non-cash impairment charge for the thirty-nine weeks ended September 29, 2021 related to one restaurant closed in Texas in 2019 and one restaurant in California. The Company recorded a $0.5 million non-cash impairment charge for the thirty-nine weeks ended September 23, 2020 related to one restaurant in Texas sold to franchisees in the prior year. See Note 1, “Basis of

Presentation and Summary of Significant Accounting Policies – Impairment of Long-Lived Assets and ROU Assets” for additional information.

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 utilizes a third-party valuation firm in determining the discount rate, based on the above assumptions. For all other leases, the Company uses the discount rate implicit in the lease, or the Company’s incremental borrowing rate.

As the Company has adopted 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
	September 29, 2021						September 23, 2020
	Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	18	$	1	$	19	$	—	$	—	$	—
Interest on lease liabilities		14		1		15		5		—		5
Operating lease cost		6,552		267		6,819		6,502		297		6,799
Short-term lease cost		—		7		7		—		6		6
Variable lease cost		138		70		208		116		50		166
Sublease income		(1,128)		—		(1,128)		(883)		—		(883)
Total lease cost	$	5,594	$	346	$	5,940	$	5,740	$	353	$	6,093


	Thirty-Nine Weeks Ended
	September 29, 2021						September 23, 2020
	Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	60	$	2	$	62	$	—	$	—	$	—
Interest on lease liabilities		44		2		46		16		—		16
Operating lease cost		19,935		861		20,796		19,577		911		20,488
Short-term lease cost		—		17		17		—		18		18
Variable lease cost		413		260		673		325		120		445
Sublease income		(2,722)		—		(2,722)		(2,424)		—		(2,424)
Total lease cost	$	17,730	$	1,142	$	18,872	$	17,494	$	1,049	$	18,543

The following table presents the Company’s total lease cost on the condensed consolidated statements of income (in thousands):


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 29, 2021		September 23, 2020		September 29, 2021		September 23, 2020
Lease cost – Occupancy and other operating expenses	$	5,811	$	5,786	$	18,191	$	17,582
Lease cost – General & administrative		97		114		316		344
Lease cost – Depreciation and amortization		18		5		60		16
Lease cost – Interest expense		14		—		44		—
Lease cost - Closed-store reserve		—		188		261		601
Total lease cost	$	5,940	$	6,093	$	18,872	$	18,543

During the thirty-nine weeks ended September 29, 2021 and September 23, 2020, the Company had the following cash and non-cash activities associated with its leases (dollars in thousands):



	Thirty-Nine Weeks Ended September 29, 2021								Thirty-Nine Weeks Ended September 23, 2020
	Property			Equipment					Property			Equipment
	Leases			Leases			Total		Leases			Leases			Total
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	19,371		$	831		$	20,202	$	16,348		$	928		$	17,276
Financing cash flows used for finance leases	$	67		$	33		$	100	$	24		$	2		$	26

Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for lease liabilities:
Operating lease ROU assets	$	13,848		$	—		$	13,848	$	3,180		$	41		$	3,221
Finance lease ROU assets obtained in exchange for lease liabilities:
Finance lease ROU assets	$	—		$	196		$	196	$	—		$	—		$	—
Derecognition of ROU assets due to terminations, impairment or modifications	$	(4,513)		$	(99)		$	(4,612)	$	(543)		$	(26)		$	(569)

Other Information
Weighted-average remaining lease term—finance leases		18.56			4.27					2.08			4.83
Weighted-average remaining lease term—operating leases		11.37			1.66					11.62			2.59
Weighted-average discount rate—finance leases		2.84	%		1.54	%				11.10	%		1.68	%
Weighted-average discount rate—operating leases		4.43	%		3.91	%				4.31	%		3.89	%

Information regarding the Company’s minimum future lease obligations as of September 29, 2021 is as follows (in thousands):


	Finance		Operating Leases
	Minimum		Minimum		Minimum
	Lease		Lease		Sublease
For the Years Ending	Payments		Payments		Income
December 29, 2021	$	50	$	7,272	$	857

December 28, 2022		190		27,651		3,468
December 27, 2023		145		25,593		3,571
December 25, 2024		145		23,491		3,456
December 31, 2025		141		21,247		3,106
Thereafter		1,690		143,011		25,746
Total	$	2,361	$	248,265	$	40,204
Less: imputed interest (1.54% - 4.43%)		(470)		(55,750)
Present value of lease obligations		1,891		192,515
Less: current maturities		(149)		(19,718)
Noncurrent portion	$	1,742	$	172,797

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 statements 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 was incurred.

In April 2020, the FASB issued guidance allowing entities to make a policy election whether to account for lease concessions related to the COVID-19 pandemic as lease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During fiscal 2020, the Company received non-substantial concessions from certain landlords in the form of rent deferrals and abatements. The Company elected to not account for these rent concessions as lease modifications. The rent concessions are recorded as part of other accrued expenses. The recognition of rent concessions did not have a material impact on the Company’s condensed consolidated financial statements as of September 29, 2021.

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.

The Company received $0.1 million of lease income from company-owned locations for each of the thirteen weeks ended September 29, 2021 and September 23, 2020. The Company received $0.3 million and $0.4 million of lease income from company-owned locations for the thirty-nine weeks ended September 29, 2021 and September 23, 2020, respectively.