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Leases

6 Months Ended

Jun. 28, 2020

The Company utilizes land and buildings in its operations under various lease agreements. The Company does not consider any one of these individual leases material to the Company's operations. Initial lease terms are generally for twenty years and, in many cases, provide for renewal options and in most cases rent escalations. The exercise of such renewal options are generally at the Company’s sole discretion. The Company evaluates renewal options at lease commencement to determine if such options are reasonably certain to be exercised based on economic factors. Certain leases also require contingent rent, determined as a percentage of sales as defined by the terms of the applicable lease agreement. For most locations, the Company is obligated for occupancy related costs including payment of property taxes, insurance and utilities.

As a result of the COVID-19 pandemic and the economic uncertainty in the restaurant industry that has resulted, the Company contacted each of its landlords to potentially negotiate accommodations to preserve cash, and for certain leases was able to modify existing payment terms, in some cases through deferral of existing payments until future periods and in some cases through a reduction in payments due during this period. The Company elected the practical expedient to not evaluate whether a deferral of rent within the current term is a lease modification. Any concessions which resulted in extension of the existing lease term were accounted for as a lease modification under the current GAAP guidance. The total rent that was or will be deferred as a result of requests for relief from our landlords other than BKC (see Note 11) was $5.8 million, of which $4.8 million is expected to be repaid over various periods beginning in the third quarter of 2020.

The right-of-use (“ROU”) lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use. As the rate implicit within our leases is not readily determinable, the Company uses its incremental borrowing rate which considers the Company's debt issuances and lease term in determining the present value of future payments. The ROU asset is also reduced by lease incentives and initial direct costs and is adjusted by favorable lease assets and unfavorable lease liabilities. Variable lease components represent amounts that are contractually fixed percentage of sales and are recognized in expense as incurred. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components.

In addition, the Company utilizes certain restaurant equipment under various finance lease agreements with initial terms of generally eight years. The Company does not consider any one of these individual leases material to the Company's operations.

For certain leases where rent escalates based upon a change in a financial index, such as the Consumer Price Index, the difference between the rate at lease inception and the subsequent fluctuations in that rate are included in variable lease costs. Additionally, because the Company has elected to not separate lease and non-lease components, in limited instances variable costs also include payments to the landlord for common area maintenance, real estate taxes, insurance and other operating expenses. Lease expense is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred.

Lease Cost

The components and classification of lease expense for the three and six months ended June 28, 2020 and June 30, 2019 are as follows:



		Three Months Ended						Six Months Ended
Lease cost	Classification	June 28, 2020			June 30, 2019			June 28, 2020			June 30, 2019
Operating lease cost (1)	Restaurant rent expense	$	25,491		$	22,543		$	50,962		$	40,837
Operating lease cost	General and administrative	167			148			265			222
Variable lease cost	Restaurant rent expense	3,599			4,290			7,704			8,090
Sublease income	Restaurant rent expense	(106		)	(143		)	(228		)	(321		)
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	437			523			882			999
Interest on lease liabilities	Interest expense	36			64			82			135
Total lease cost		$	29,624		$	27,425		$	59,667		$	49,962


(1)	Includes short-term leases which are not material.

Other Information

Supplemental cash flow information related to leases for the six months ended June 28, 2020 and June 30, 2019 are as follows:



	Six Months Ended
	June 28, 2020		June 30, 2019
Gain (loss) on sale-leaseback transactions	$	567	$	105
Lease assets and liabilities resulting from lease modifications and new leases	$	39,953	$	36,124
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	49,143	$	36,006
Operating cash flows from finance leases	$	36	$	135
Financing cash flows from finance leases	$	1,134	$	981

Leases

Lease Cost

The components and classification of lease expense for the three and six months ended June 28, 2020 and June 30, 2019 are as follows:



		Three Months Ended						Six Months Ended
Lease cost	Classification	June 28, 2020			June 30, 2019			June 28, 2020			June 30, 2019
Operating lease cost (1)	Restaurant rent expense	$	25,491		$	22,543		$	50,962		$	40,837
Operating lease cost	General and administrative	167			148			265			222
Variable lease cost	Restaurant rent expense	3,599			4,290			7,704			8,090
Sublease income	Restaurant rent expense	(106		)	(143		)	(228		)	(321		)
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	437			523			882			999
Interest on lease liabilities	Interest expense	36			64			82			135
Total lease cost		$	29,624		$	27,425		$	59,667		$	49,962


(1)	Includes short-term leases which are not material.

Other Information

Supplemental cash flow information related to leases for the six months ended June 28, 2020 and June 30, 2019 are as follows:



	Six Months Ended
	June 28, 2020		June 30, 2019
Gain (loss) on sale-leaseback transactions	$	567	$	105
Lease assets and liabilities resulting from lease modifications and new leases	$	39,953	$	36,124
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	49,143	$	36,006
Operating cash flows from finance leases	$	36	$	135
Financing cash flows from finance leases	$	1,134	$	981