Red Robin Gourmet Burgers, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

6 Months Ended

Jul. 14, 2019

Adoption of Financial Accounting Standards Board (“FASB”) ASU 2016-02

On January 1, 2019, we adopted ASU 2016-02, “Leases (Topic 842),” along with related clarifications and improvements using the modified retrospective approach without application to prior periods. This guidance requires the recognition of liabilities for lease obligations and corresponding right-of-use assets on the balance sheet and disclosure of key information about leasing arrangements. We applied the practical expedients that do not require us to reassess existing contracts for embedded leases, to separate lease and non-lease components for our population of operating assets, or to reassess lease classification or initial direct costs.

The effect of the changes made to our consolidated December 31, 2018 balance sheet as a result of the adoption of Topic 842 was as follows (in thousands):



	Balance at December 30, 2018		Adjustments due to Topic 842			Balance at December 31, 2018
	Balance at December 30, 2018		Adjustments due to Topic 842			Balance at December 31, 2018
Balance sheet
Non-current assets
Right of use assets, net	$	—	$	478,268		$	478,268
Prepaid expenses and other current assets	27,576		(6,592		)	20,984

Current liabilities
Short-term portion of lease obligations	786		40,606			41,392
Non-current liabilities
Deferred Rent	75,675		(75,675		)	—
Long-term portion of lease obligations	9,414		506,745			516,159

Stockholders’ equity:
Retained earnings	$	376,341	$	(15,172	)	$	361,169

This change did not have any impact on our consolidated statement of operations or consolidated statement of cash flows.

Leases

The Company leases land, buildings, and equipment used in its operations under operating and finance leases. Our leases generally have remaining terms of 1-15 years, most of which include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.

We determine if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. We estimate this rate based on comparable company and credit analysis, prevailing financial market conditions, comparable company and credit analysis, as well as management judgment.

Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.

Some of our leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Leases are included in right-of-use assets, net, short-term portion of lease obligations, and long-term portion of lease liabilities on our condensed consolidated balance sheet as of July 14, 2019 as follows (in thousands):



	Finance		Operating		Total
Right of use assets, net	$	8,878	$	439,474	$	448,352

Short-term portion of lease obligations	931		41,205		42,136
Long-term portion of lease obligations	10,459		492,571		503,030
Total	$	11,390	$	533,776	$	545,166

We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and real estate taxes, are included in occupancy on our condensed consolidated statement of operations as follows (in thousands):



	Twelve Weeks Ended		Twenty-Eight Weeks Ended
	July 14, 2019		July 14, 2019
Operating lease cost	$	17,442	$	41,114
Finance lease cost
Amortization of right of use assets	193		441
Interest on lease liabilities	125		294
Total finance lease cost	318		735
Variable lease cost	6,647		15,532
Total	$	24,407	$	57,381

Maturities of our lease liabilities as of July 14, 2019 were as follows (in thousands):



	Finance Leases		Operating Leases		Total
Remainder of 2019	$	626	$	32,754	$	33,380
2020	1,396		78,506		79,902
2021	1,437		77,773		79,210
2022	1,283		75,260		76,543
2023	1,220		72,931		74,151
Thereafter	8,828		469,432		478,260
Total future lease liability	14,790		806,656		821,446
Less imputed interest	3,400		272,880		276,280
Fair value of lease liability	$	11,390	$	533,776	$	545,166

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting guidance, maturities of lease liabilities were as follows as of December 30, 2018 (in thousands):



	Capital Leases			Operating Leases
2019	$	1,234		$	80,367
2020	1,242			76,936
2021	1,240			70,419
2022	1,063			61,649
2023	1,019			54,121
Thereafter	7,552			206,879
Total	13,350			$	550,371
Less amount representing interest	(3,150		)
Present value of future minimum lease payments	10,200
Less current portion	(786		)
Long-term capital lease obligations	$	9,414

Supplemental cash flow information related to leases is as follows:



	Twenty-Eight Weeks Ended
	July 14, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):	$	40,129
Right of use assets obtained in exchange for operating lease obligations following the adoption of Topic 842 (in thousands):	$	7,022
Right of use assets obtained in exchange for finance lease obligations following the adoption of Topic 842 (in thousands):	$	1,669

Other information related to operating leases as follows:
Weighted average remaining lease term	11 years
Weighted average discount rate	7.35		%

Other information related to financing leases as follows:
Weighted average remaining lease term	12 years
Weighted average discount rate	4.74		%

Leases

Adoption of Financial Accounting Standards Board (“FASB”) ASU 2016-02

The effect of the changes made to our consolidated December 31, 2018 balance sheet as a result of the adoption of Topic 842 was as follows (in thousands):



	Balance at December 30, 2018		Adjustments due to Topic 842			Balance at December 31, 2018
	Balance at December 30, 2018		Adjustments due to Topic 842			Balance at December 31, 2018
Balance sheet
Non-current assets
Right of use assets, net	$	—	$	478,268		$	478,268
Prepaid expenses and other current assets	27,576		(6,592		)	20,984

Current liabilities
Short-term portion of lease obligations	786		40,606			41,392
Non-current liabilities
Deferred Rent	75,675		(75,675		)	—
Long-term portion of lease obligations	9,414		506,745			516,159

Stockholders’ equity:
Retained earnings	$	376,341	$	(15,172	)	$	361,169

This change did not have any impact on our consolidated statement of operations or consolidated statement of cash flows.

Leases



	Finance		Operating		Total
Right of use assets, net	$	8,878	$	439,474	$	448,352

Short-term portion of lease obligations	931		41,205		42,136
Long-term portion of lease obligations	10,459		492,571		503,030
Total	$	11,390	$	533,776	$	545,166



	Twelve Weeks Ended		Twenty-Eight Weeks Ended
	July 14, 2019		July 14, 2019
Operating lease cost	$	17,442	$	41,114
Finance lease cost
Amortization of right of use assets	193		441
Interest on lease liabilities	125		294
Total finance lease cost	318		735
Variable lease cost	6,647		15,532
Total	$	24,407	$	57,381

Maturities of our lease liabilities as of July 14, 2019 were as follows (in thousands):



	Finance Leases		Operating Leases		Total
Remainder of 2019	$	626	$	32,754	$	33,380
2020	1,396		78,506		79,902
2021	1,437		77,773		79,210
2022	1,283		75,260		76,543
2023	1,220		72,931		74,151
Thereafter	8,828		469,432		478,260
Total future lease liability	14,790		806,656		821,446
Less imputed interest	3,400		272,880		276,280
Fair value of lease liability	$	11,390	$	533,776	$	545,166



	Capital Leases			Operating Leases
2019	$	1,234		$	80,367
2020	1,242			76,936
2021	1,240			70,419
2022	1,063			61,649
2023	1,019			54,121
Thereafter	7,552			206,879
Total	13,350			$	550,371
Less amount representing interest	(3,150		)
Present value of future minimum lease payments	10,200
Less current portion	(786		)
Long-term capital lease obligations	$	9,414

Supplemental cash flow information related to leases is as follows:



	Twenty-Eight Weeks Ended
	July 14, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):	$	40,129
Right of use assets obtained in exchange for operating lease obligations following the adoption of Topic 842 (in thousands):	$	7,022
Right of use assets obtained in exchange for finance lease obligations following the adoption of Topic 842 (in thousands):	$	1,669

Other information related to operating leases as follows:
Weighted average remaining lease term	11 years
Weighted average discount rate	7.35		%

Other information related to financing leases as follows:
Weighted average remaining lease term	12 years
Weighted average discount rate	4.74		%