LEASES

12 Months Ended

Dec. 27, 2023

LEASES

LEASES

5. 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 December 27, 2023, the Company had no leases that it had entered into, but had not yet commenced.

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 13 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 common area maintenance, 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 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 year ended December 27, 2023, the Company reassessed the lease terms on 36 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $21.5 million of ROU assets and lease liabilities for the year ended December 27, 2023 were recognized, and will be amortized over the new lease term.

During the year ended December 28, 2022, the Company reassessed the lease terms on 22 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $13.0 million of ROU assets and lease liabilities for the year ended December 28, 2022 were recognized, and will be amortized over the new lease term.

There were no reassessments that impacted the original lease classification during the year ended December 27, 2023. The reassessments had an impact on the original lease classification of one property during the year ended December 28, 2022 which represented $0.7 million of the $13.0 million total additional ROU asset and lease liabilities for fiscal 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 fiscal 2023, the Company determined that the carrying value of an ROU assets at one restaurant was not recoverable. As a result, the Company recorded a less than $0.1 million non-cash impairment charge for the year ended

December 27, 2023 related to one restaurant in California. During fiscal 2022, the Company determined that the carrying value of an ROU assets at one restaurant was not recoverable. As a result, the Company recorded a less than $0.1 million non-cash impairment charge for the year ended December 28, 2022 related to one restaurant closed in California. During fiscal 2021, the Company determined that the carrying value of ROU assets at two restaurants were not recoverable. As a result, the Company recorded a $0.4 million non-cash impairment charge for the year ended December 29, 2021 related to one restaurant closed in Texas in 2019 and one restaurant closed in California.

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. 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):

	December 27, 2023						December 28, 2022						December 29, 2021
	Property		Equipment				Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	73	$	2	$	75	$	73	$	2	$	75	$	78	$	2	$	80
Interest on lease liabilities		40		5		45		42		3		45		58		1		59
Operating lease cost:
Fixed rent cost		27,597		387		27,984		26,537		1,005		27,542		26,501		1,122		27,623
Short-term lease cost		—		8		8		—		18		18		—		21		21
Variable lease cost		546		1,279		1,825		597		677		1,274		539		354		893
Sublease income		(5,570)		—		(5,570)		(4,555)		—		(4,555)		(3,823)		—		(3,823)
Total lease cost	$	22,686	$	1,681	$	24,367	$	22,694	$	1,705	$	24,399	$	23,353	$	1,500	$	24,853

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

	December 27, 2023		December 28, 2022		December 29, 2021
Lease cost – Occupancy and other operating expenses	$	23,736	$	23,730	$	24,020
Lease cost – General & administrative		492		465		413
Lease cost – Depreciation and amortization		75		73		78
Lease cost – Interest expense		45		45		59
Lease cost – Closed-store reserve		19		86		283
Total lease cost	$	24,367	$	24,399	$	24,853

The Company had the following cash and non-cash activities associated with its leases (dollar amounts in thousands):

	December 27, 2023								December 28, 2022								December 29, 2021
	Property			Equipment					Property			Equipment					Property			Equipment
	Leases			Leases			Total		Leases			Leases			Total		Leases			Leases			Total
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	27,835		$	321		$	28,156	$	27,221		$	953		$	28,174	$	26,414		$	1,084		$	27,498
Financing cash flows used for finance leases	$	93		$	65		$	158	$	106		$	56		$	162	$	102		$	46		$	148
Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for lease liabilities:
Operating lease ROU assets	$	21,448		$	54		$	21,502	$	12,978		$	92		$	13,070	$	17,763		$	—		$	17,763
Finance lease ROU assets obtained in exchange for lease liabilities:
Finance lease ROU assets	$	—		$	135		$	135	$	—		$	28		$	28	$	—		$	196		$	196
Derecognition of ROU assets due to terminations, impairment or modifications	$	(40)		$	(4)		$	(44)	$	(39)		$	(35)		$	(74)	$	(4,513)		$	(99)		$	(4,612)
Other Information
Weighted-average remaining years in lease term—finance leases		16.87			3.15					17.87			3.19					18.42			4.02
Weighted-average remaining years in lease term—operating leases		10.42			3.33					10.73			1.73					11.27			1.44
Weighted-average discount rate—finance leases		2.57	%		5.68	%				2.57	%		1.53	%				2.78	%		1.54	%
Weighted-average discount rate—operating leases		5.00	%		4.52	%				4.54	%		3.80	%				4.45	%		3.89	%

Information regarding the Company’s minimum future lease obligations at December 27, 2023 is as follows (in thousands):

	Finance Leases		Operating Leases
	Minimum		Minimum		Minimum
	Lease		Lease		Sublease
For the Years Ending	Payments		Payments		Income
December 25, 2024	$	191	$	28,328	$	5,886
December 31, 2025		187		27,126		5,518
December 30, 2026		154		25,043		5,034
December 29, 2027		144		23,581		4,858
December 27, 2028		103		21,384		4,484
Thereafter		1,376		118,426		27,854
Total	$	2,155	$	243,888	$	53,634
Less: imputed interest (2.57% - 5.68%)		(398)		(56,314)
Present value of lease obligations		1,757		187,574
Less: current maturities		(140)		(19,490)
Noncurrent portion	$	1,617	$	168,084

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 income 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 3 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 years ended December 27, 2023, December 28, 2022, and December 29, 2021, the Company received $0.3 million, $0.4 million and $0.4 million, respectively, of lease income from company-owned locations.