Annual report pursuant to Section 13 and 15(d)

Leases

v3.19.3.a.u2
Leases
 12 Months Ended
Dec. 29, 2019
Leases [Abstract]  
Leases
Leases
Adoption of FASB Accounting Standards Update ("ASU") 2016-02
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) ("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 real estate 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 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 prevailing financial market conditions, comparable company and credit analysis, and 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 consolidated balance sheet as of December 29, 2019 as follows (in thousands):
 
 
Finance
 
Operating
 
Total
Right of use assets, net
 
$
7,552

 
$
418,696

 
$
426,248

 
 
 
 
 
 
 
Short-term portion of lease obligations
 
725

 
41,974

 
42,699

Long-term portion of lease obligations
 
8,822

 
456,613

 
465,435

Total
 
$
9,547

 
$
498,587

 
$
508,134


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 consolidated statement of operations as follows (in thousands):
 
 
Year Ended
 
 
December 29, 2019
Operating lease cost
 
$
75,496

Finance lease cost:
 
 
Amortization of right of use assets
 
793

Interest on lease liabilities
 
544

Total finance lease cost
 
1,337

Variable lease cost
 
29,300

Total lease costs
 
$
106,133


Maturities of our lease liabilities as of December 29, 2019 were as follows (in thousands):
 
Finance Leases
 
Operating Leases
 
Total
2020
$
1,065

 
$
70,303

 
$
71,368

2021
1,133

 
75,990

 
77,123

2022
979

 
73,702

 
74,681

2023
916

 
71,670

 
72,586

2024
932

 
68,468

 
69,400

Thereafter
7,506

 
379,644

 
387,150

Total future lease liability
12,531

 
739,777

 
752,308

Less imputed interest
2,984

 
241,190

 
244,174

Present value of lease liability
$
9,547

 
$
498,587

 
$
508,134


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 in thousands (except other information) related to leases is as follows:
 
 
Year Ended
 
 
December 29, 2019
Cash flows from operating activities
 
 
Cash paid related to lease liabilities
 
 
Operating leases
 
$
78,260

Finance leases
 
512

Cash flows from financing activities
 
 
Cash paid related to lease liabilities
 
 
Finance leases
 
817

Cash paid for amounts included in the measurement of lease liabilities
 
$
79,589

 
 
 
Right of use assets obtained in exchange for operating lease obligations following the adoption of Topic 842 (Leases)
 
$
12,580

Right of use assets obtained in exchange for finance lease obligations following the adoption of Topic 842 (Leases)
 
$
1,606

 
 
 
Other information related to operating leases as follows:
 
 
Weighted average remaining lease term
 
10.7 years

Weighted average discount rate
 
7.4
%
 
 
 
Other information related to financing leases as follows:
 
 
Weighted average remaining lease term
 
12.4 years

Weighted average discount rate
 
4.9
%
Leases
Leases
Adoption of FASB Accounting Standards Update ("ASU") 2016-02
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) ("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 real estate 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 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 prevailing financial market conditions, comparable company and credit analysis, and 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 consolidated balance sheet as of December 29, 2019 as follows (in thousands):
 
 
Finance
 
Operating
 
Total
Right of use assets, net
 
$
7,552

 
$
418,696

 
$
426,248

 
 
 
 
 
 
 
Short-term portion of lease obligations
 
725

 
41,974

 
42,699

Long-term portion of lease obligations
 
8,822

 
456,613

 
465,435

Total
 
$
9,547

 
$
498,587

 
$
508,134


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 consolidated statement of operations as follows (in thousands):
 
 
Year Ended
 
 
December 29, 2019
Operating lease cost
 
$
75,496

Finance lease cost:
 
 
Amortization of right of use assets
 
793

Interest on lease liabilities
 
544

Total finance lease cost
 
1,337

Variable lease cost
 
29,300

Total lease costs
 
$
106,133


Maturities of our lease liabilities as of December 29, 2019 were as follows (in thousands):
 
Finance Leases
 
Operating Leases
 
Total
2020
$
1,065

 
$
70,303

 
$
71,368

2021
1,133

 
75,990

 
77,123

2022
979

 
73,702

 
74,681

2023
916

 
71,670

 
72,586

2024
932

 
68,468

 
69,400

Thereafter
7,506

 
379,644

 
387,150

Total future lease liability
12,531

 
739,777

 
752,308

Less imputed interest
2,984

 
241,190

 
244,174

Present value of lease liability
$
9,547

 
$
498,587

 
$
508,134


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 in thousands (except other information) related to leases is as follows:
 
 
Year Ended
 
 
December 29, 2019
Cash flows from operating activities
 
 
Cash paid related to lease liabilities
 
 
Operating leases
 
$
78,260

Finance leases
 
512

Cash flows from financing activities
 
 
Cash paid related to lease liabilities
 
 
Finance leases
 
817

Cash paid for amounts included in the measurement of lease liabilities
 
$
79,589

 
 
 
Right of use assets obtained in exchange for operating lease obligations following the adoption of Topic 842 (Leases)
 
$
12,580

Right of use assets obtained in exchange for finance lease obligations following the adoption of Topic 842 (Leases)
 
$
1,606

 
 
 
Other information related to operating leases as follows:
 
 
Weighted average remaining lease term
 
10.7 years

Weighted average discount rate
 
7.4
%
 
 
 
Other information related to financing leases as follows:
 
 
Weighted average remaining lease term
 
12.4 years

Weighted average discount rate
 
4.9
%