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LEASES

9 Months Ended

Sep. 27, 2023

Nature of Leases

Shake Shack currently leases all of its domestic Company-operated Shacks, the home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2044. The Company evaluates 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. The Company evaluates whether it controls the use of the asset, which is determined by assessing whether substantially all economic benefit from the use of the asset is obtained, and whether the Company has the right to direct the use of the asset. If these criteria are met, the Company has identified a lease within the contract, and therefore a right of use asset and lease liability are recorded on the Condensed Consolidated Balance Sheet. Upon possession of a leased asset, the Company determines whether the lease is an operating or finance lease. All of the Company's real estate leases are classified as operating leases and most equipment leases are classified as finance leases.

Generally, 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 the Company would exercise the renewal options. Real estate leases typically contain fixed minimum rent payments and/or contingent rent payments which are based upon sales in excess of specified thresholds. When the achievement of such sales thresholds are deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period.

For operating leases, fixed lease payments are recognized as operating lease costs on a straight-line basis over the lease term within the Condensed Consolidated Statements of Income (Loss) in the following line items. Lease expense incurred before a Shack opens is recorded in Pre-opening costs. Once a domestic Company-operated Shack opens, the straight-line lease expense and contingent rent, if applicable, are recorded in Occupancy and related expenses. Many of these leases also require the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses. Finance leases are recognized in depreciation expense on a straight-line basis over the remaining lease term, along with recognition of interest expense associated with accretion of the lease liability.

For both operating and finance leases that contain lease and non-lease components, the components are combined and accounted for as a single lease component. Variable lease costs for both operating and finance leases, if any, are recognized as incurred. Leases with a term of 12 months or less are deemed short-term and are not recognized on the Condensed Consolidated Balance Sheets. Fixed lease payments for short-term leases are recognized on a straight-line basis over the lease term.

The Company calculates operating lease assets and lease liabilities as the present value of fixed lease payments over the reasonably certain lease term beginning at the commencement date. The Company uses its incremental borrowing rate ("IBR") in determining the present value of future lease payments as there are no explicit rates provided in the leases. The IBR used to measure the lease liability is 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 IBR is the Company's credit rating and is subject to judgment. The credit rating used to develop the IBR is determined by utilizing the credit ratings of other public companies with similar financial information as SSE Holdings.

The Company expends cash for leasehold improvements to build out and equip leased properties. Generally, a portion of the leasehold improvements and building costs are reimbursed by the landlords through landlord incentives pursuant to agreed-upon terms in the lease agreements. Landlord incentives usually take the form of cash, full or partial credits against future minimum or contingent rents otherwise payable by the Company, or a combination thereof. In most cases, landlord incentives are received after the Company takes possession of the property and as milestones are met during the construction of the property. The Company includes these amounts in the measurement of the initial operating lease liability, and lease asset.

A summary of operating and finance lease assets and lease liabilities were as follows:


	Classification	September 27 2023		December 28 2022
Operating leases	Operating lease assets	$	397,870	$	367,488
Finance leases	Property and equipment, net	11,155		6,152
Total right-of-use assets		$	409,025	$	373,640




Operating leases:
	Operating lease liabilities, current	$	47,610	$	42,238
	Long-term operating lease liabilities	463,370		427,227
Finance leases:
	Other current liabilities	3,235		2,546
	Other long-term liabilities	8,215		3,909
Total lease liabilities		$	522,430	$	475,920

The components of lease expense were as follows:


			Thirteen Weeks Ended				Thirty-Nine Weeks Ended
		Classification	September 27 2023		September 28 2022		September 27 2023		September 28 2022
Operating lease cost		Occupancy and related expenses Pre-opening costs General and administrative expenses	$	17,177	$	15,178	$	49,775	$	43,188
Finance lease cost:
	Amortization of right-of-use assets	Depreciation and amortization expense	936		750		2,376		2,275
	Interest on lease liabilities	Interest expense	163		55		305		162
Variable lease cost		Occupancy and related expenses Pre-opening costs General and administrative expenses	4,488		3,887		12,940		10,994
Short-term lease cost		Occupancy and related expenses	206		264		719		395
Total lease cost			$	22,970	$	20,134	$	66,115	$	57,014

As of September 27, 2023, future minimum lease payments for operating and finance leases consisted of the following:


	Operating Leases		Finance Leases
2023(1)	$	7,463	$	1,014
2024	76,359		3,654
2025	80,780		3,010
2026	77,336		2,240
2027	73,003		1,893
Thereafter	342,416		1,106
Total minimum payments	657,357		12,917
Less: imputed interest	158,505		1,467
Total lease liabilities	$	498,852	$	11,450

(1)Operating leases are net of certain tenant allowance receivables that were reclassified to Other current assets as of September 27, 2023.

As of September 27, 2023 the Company had additional operating lease commitments of $129,245 for non-cancelable leases without a possession date, which commence in 2023 or later. These lease commitments are materially consistent with the leases that have been executed thus far.

A summary of lease terms and discount rates for operating and finance leases were as follows:


		September 27 2023		December 28 2022
Weighted average remaining lease term (years):
	Operating leases	8.9		8.9
	Finance leases	4.9		5.1
Weighted average discount rate:
	Operating leases	6.0	%	5.7	%
	Finance leases	5.4	%	4.0	%

Supplemental cash flow information related to leases was as follows:


		Thirty-Nine Weeks Ended
		September 27 2023		September 28 2022
Cash paid for amounts included in the measurement of lease liabilities:
	Operating cash flows from operating leases	$	52,913	$	45,398
	Operating cash flows from finance leases	305		162
	Financing cash flows from finance leases	2,383		2,260
Right-of-use assets obtained in exchange for lease obligations:
	Operating leases	60,560		45,927
	Finance leases	7,379		1,376

LEASES