LEASES

6 Months Ended

Jun. 24, 2020

Nature of Leases

We lease all of our domestic company-operated Shacks, our home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2035. We evaluate contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. We evaluate whether we control the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset, and whether we have the right to direct the use of the asset. If these criteria are met and we have identified a lease, we account for the contract under the requirements of Accounting Standards Codification Topic 842 ("ASC 842").

Upon the possession of a leased asset, we determine its classification as an operating or finance lease. Our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases. Generally, our real estate leases have initial terms ranging from 10 to 15 years and typically include two five-year renewal options. Renewal options are generally not recognized as part of the right-of-use assets and lease liabilities as it is not reasonably certain at commencement date that we would exercise the options to extend the lease. Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. When the achievement of such sales thresholds is deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. For operating leases that include rent holidays and rent escalation clauses, we recognize lease expense on a straight-line basis over the lease term from the date we take possession of the leased property. Lease expense incurred before a Shack opens is recorded in pre-opening costs. Once a domestic company-operated Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, in occupancy and related expenses on the Condensed Consolidated Statements of Income (Loss). Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and related expenses on the Condensed Consolidated Statements of Income (Loss).

As there were no explicit rates provided in our leases, we used our incremental borrowing rate in determining the present value of future lease payments. The discount rate used to measure the lease liability at the transition date was derived from the average of the yield curves obtained from using the notching method and the recovery rate method. The most significant assumption in calculating the incremental borrowing rate is our credit rating and subject to judgment. We determined our credit rating based on a comparison of the financial information of SSE Holdings to other public companies and then used their respective credit ratings to develop our own.

We expend cash for leasehold improvements to build out and equip our leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements. If obtained, landlord incentives usually take the form of cash, full or partial credits against our future minimum or contingent rents otherwise payable by us, or a combination thereof. In most cases, landlord incentives are received after we take possession of the property, as we meet required milestones during the construction of the property. We include these

amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset.

A summary of finance and operating lease right-of-use assets and liabilities as of June 24, 2020 and December 25, 2019 is as follows:


	Classification	June 24 2020		December 25 2019
Finance leases	Property and equipment, net	$	5,248	$	5,444
Operating leases	Operating lease assets	298,602		274,426
Total right-of-use assets		$	303,850	$	279,870




Finance leases:
	Other current liabilities	$	1,802	$	1,873
	Other long-term liabilities	3,559		3,643
Operating leases:
	Operating lease liabilities, current	37,082		30,002
	Long-term operating lease liabilities	332,751		304,914
Total lease liabilities		$	375,194	$	340,432

The components of lease expense for the thirteen and twenty-six weeks ended June 24, 2020 and June 26, 2019 was as follows:


			Thirteen Weeks Ended												Twenty-Six Weeks Ended
		Classification	June 24 2020				June 26 2019				June 24 2020				June 26 2019
Finance lease cost:
	Amortization of right-of-use assets	Depreciation expense	$	602			$	619			$	1,179			$	953
	Interest on lease liabilities	Interest expense	55				55				110				96
Operating lease cost			Occupancy and related expenses General and administrative expenses Pre-opening costs		11,478				9,855				22,220				18,765
Short-term lease cost			Occupancy and related expenses		69				17				193				34
Variable lease cost			Occupancy and related expenses General and administrative expenses Pre-opening costs		4,087				3,836				7,817				7,298
Total lease cost					$	16,291			$	14,382			$	31,519			$	27,146

As of June 24, 2020, future minimum lease payments for finance and operating leases consisted of the following:


	Finance Leases		Operating Leases
2020	$	1,051	$	21,424
2021	1,765		47,721
2022	1,284		52,463
2023	823		52,737
2024	496		51,697
Thereafter	337		262,345
Total minimum payments	5,756		488,387
Less: imputed interest	395		118,553
Total lease liabilities	$	5,361	$	369,833

As of June 24, 2020 we had additional operating lease commitments of $53,952 for non-cancelable leases without a possession date, which will begin to commence in 2020. These lease commitments are consistent with the leases that we have executed thus far and include a number of real estate leases where we are involved in the construction and design.

A summary of lease terms and discount rates for finance and operating leases as of June 24, 2020 and December 25, 2019 is as follows:


		June 24 2020		December 25 2019
Weighted-average remaining lease term (years):
	Finance leases	5.1		5.1
	Operating leases	10.1		10.1
Weighted-average discount rate:
	Finance leases	3.6	%	3.7	%
	Operating leases	4.0	%	5.4	%

Supplemental cash flow information related to leases for the twenty-six weeks ended June 24, 2020 and June 26, 2019 is as follows:


		Twenty-Six Weeks Ended
		June 24 2020		June 26 2019
Cash paid for amounts included in the measurement of lease liabilities:
	Operating cash flows from finance leases	$	110	$	148
	Operating cash flows from operating leases	15,799		27,238
	Financing cash flows from finance leases	1,150		1,433
Right-of-use assets obtained in exchange for lease obligations:
	Finance leases	1,020		1,927
	Operating leases	30,982		65,773

LEASES