Leases

3 Months Ended

Apr. 03, 2022

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 provide for renewal options with rent escalations. The exercise of such renewal options is generally at the Company’s sole discretion. The Company evaluates renewal options at lease commencement and upon any lease amendments or remodeling activity to determine if such options are reasonably certain to be exercised based on economic factors. Certain leases also require variable 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.

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 market and term-specific incremental borrowing rates which consider the rate of interest it expects to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. ROU assets are also reduced by lease incentives, increased by initial direct costs and adjusted by favorable lease assets and unfavorable lease liabilities.

Variable lease components represent amounts that are contractually fixed as a 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 condensed consolidated balance sheets 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) separately from non-lease components (e.g. common area maintenance).

The Company also utilizes certain restaurant equipment under various finance lease agreements with initial terms of generally three to 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 index at lease inception and the subsequent fluctuations in that index 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 costs are incurred.

As a result of the COVID-19 pandemic and the resulting economic uncertainty in the restaurant industry in 2020, the Company contacted each of its landlords to potentially negotiate accommodations to preserve cash. For certain leases the Company 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 that would otherwise have been due. 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 an extension of the existing lease term were accounted for as a lease modification under current U.S. GAAP guidance. The total rent that was or will be deferred or abated as a result of requests for pandemic-related relief from landlords other than Burger King Corporation (“BKC”, see Note 12) was $5.8 million, of which $4.8 million has been or remains to be repaid over various schedules which began in the third quarter of 2020. As of April 3, 2022, $0.1 million remains to be repaid to landlords related to these deferrals.

Lease Cost

The components and classification of lease expense for the three months ended April 3, 2022 and April 4, 2021 are as follows:


		Three Months Ended
Lease cost	Classification	April 3, 2022		April 4, 2021
Operating lease cost(1)	Restaurant rent expense	$	26,604	$	25,742
Operating lease cost(2)	General and administrative	213		256
Variable lease cost	Restaurant rent expense	4,409		4,572

Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	487		132
Interest on lease liabilities	Interest expense	108		22
Total lease cost		$	31,821	$	30,724

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

(2)Represents operating lease costs for property and equipment not directly related to restaurant operations.

Leases

Lease Cost

The components and classification of lease expense for the three months ended April 3, 2022 and April 4, 2021 are as follows:


		Three Months Ended
Lease cost	Classification	April 3, 2022		April 4, 2021
Operating lease cost(1)	Restaurant rent expense	$	26,604	$	25,742
Operating lease cost(2)	General and administrative	213		256
Variable lease cost	Restaurant rent expense	4,409		4,572

Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	487		132
Interest on lease liabilities	Interest expense	108		22
Total lease cost		$	31,821	$	30,724

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

(2)Represents operating lease costs for property and equipment not directly related to restaurant operations.