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Leases

9 Months Ended

Sep. 28, 2022

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 28, 2022, 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 one facility and ten 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 that 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 28, 2022, the Company reassessed the lease terms on five and 18 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 $2.0 million and $10.5 million of ROU asset and lease liabilities for the thirteen and thirty-nine weeks ended September 28, 2022, respectively, were recognized and will be amortized over the new lease term. 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. This reassessment resulted in 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, which were recognized and will be amortized over the new lease term. The reassessments had an impact on the original lease classification of one property during the thirty-nine weeks ended September 28, 2022 which represented $0.7 million of the $10.5 million total additional ROU asset and lease liabilities for the period. There were no reassessments that impacted the original lease classification during the thirteen weeks ended September 28, 2022. 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 28, 2022, the Company recorded a less than $0.1 million non-cash impairment charge related to one restaurant in California. 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. 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 28, 2022						September 29, 2021
	Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	18	$	1	$	19	$	18	$	1	$	19
Interest on lease liabilities		10		1		11		14		1		15
Operating lease cost		6,646		256		6,902		6,552		267		6,819
Short-term lease cost		—		4		4		—		7		7
Variable lease cost		151		196		347		138		70		208
Sublease income		(1,130)		—		(1,130)		(1,128)		—		(1,128)
Total lease cost	$	5,695	$	458	$	6,153	$	5,594	$	346	$	5,940


	Thirty-Nine Weeks Ended
	September 28, 2022						September 29, 2021
	Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	55	$	2	$	57	$	60	$	2	$	62
Interest on lease liabilities		32		2		34		44		2		46
Operating lease cost		19,795		776		20,571		19,935		861		20,796
Short-term lease cost		—		11		11		—		17		17
Variable lease cost		458		463		921		413		260		673
Sublease income		(3,387)		—		(3,387)		(2,722)		—		(2,722)
Total lease cost	$	16,953	$	1,254	$	18,207	$	17,730	$	1,142	$	18,872

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 28, 2022		September 29, 2021		September 28, 2022		September 29, 2021
Lease cost – Occupancy and other operating expenses	$	5,969	$	5,811	$	17,709	$	18,191
Lease cost – General & administrative		133		97		343		316
Lease cost – Depreciation and amortization		18		18		55		60
Lease cost – Interest expense		11		14		35		44
Lease cost – Closed-store reserve		22		—		65		261
Total lease cost	$	6,153	$	5,940	$	18,207	$	18,872

During the thirteen and thirty-nine weeks ended September 28, 2022 and September 29, 2021, the Company had the following cash and non-cash activities associated with its leases (dollars in thousands):


	Thirty-Nine Weeks Ended September 28, 2022								Thirty-Nine Weeks Ended September 29, 2021
	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	$	20,364		$	737		$	21,101	$	19,371		$	831		$	20,202
Financing cash flows used for finance leases	$	82		$	42		$	124	$	67		$	33		$	100

Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for lease liabilities:
Operating lease ROU assets	$	10,486		$	86		$	10,572	$	13,848		$	—		$	13,848
Finance lease ROU assets obtained in exchange for lease liabilities:
Finance lease ROU assets	$	—		$	28		$	28	$	—		$	196		$	196
Derecognition of ROU assets due to terminations, impairment or modifications	$	(39)		$	(24)		$	(63)	$	(4,513)		$	(99)		$	(4,612)

Other Information
Weighted-average remaining years in lease term—finance leases		18.12			3.44					18.56			4.27
Weighted-average remaining years in lease term—operating leases		10.91			1.57					11.37			1.66
Weighted-average discount rate—finance leases		2.57	%		1.53	%				2.84	%		1.54	%
Weighted-average discount rate—operating leases		4.49	%		3.82	%				4.43	%		3.91	%

Information regarding the Company’s minimum future lease obligations as of September 28, 2022 is as follows (in thousands):


	Finance		Operating Leases
	Minimum		Minimum		Minimum
	Lease		Lease		Sublease
For the Years Ending	Payments		Payments		Income
December 28, 2022	$	38	$	7,073	$	937
December 27, 2023		151		27,673		3,698
December 25, 2024		151		25,348		3,510
December 31, 2025		147		23,186		3,115
December 30, 2026		114		21,048		2,789
Thereafter		1,583		135,928		23,165
Total	$	2,184	$	240,256	$	37,214
Less: imputed interest (1.53% - 4.49%)		(422)		(52,631)
Present value of lease obligations		1,762		187,625
Less: current maturities		(109)		(20,063)
Noncurrent portion	$	1,653	$	167,562

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 condensed consolidated statements of income 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.

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 28, 2022 and September 29, 2021. The Company received $0.3 million of lease income from company-owned locations for each of the thirty-nine weeks ended September 28, 2022 and September 29, 2021.