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Leases

6 Months Ended

Jul. 02, 2019

The Company leases restaurant facilities, office space and certain equipment that expire on various dates through September 2034. Lease terms for restaurants in traditional shopping centers generally include a base term of 10 years, with options to extend these leases for additional periods of five to 15 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

The Company’s leases typically contain rent escalations over the lease term. The Company recognizes 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 the 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 the Company’s 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.

The Company elected the practical expedient to account for lease and non-lease components as a single component for substantially all lease types.

As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

Supplemental balance sheet information related to leases is as follows (in thousands):



Classification		July 2, 2019
Assets
Operating	Operating lease assets, net	$	215,347
Finance	Finance lease assets, net ⁽¹⁾	1,057
Total leased assets		$	216,404
Liabilities
Current lease liabilities
Operating	Current operating lease liabilities	$	21,781
Finance	Current finance lease liabilities ⁽²⁾	820
Long-term lease liabilities
Operating	Long-term operating lease liabilities	233,902
Finance	Long-term finance lease liabilities ⁽²⁾	300
Total lease liabilities		$	256,803

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(1)	The finance lease assets are included in property and equipment, net in the Consolidated Balance Sheets.


(2)	The current portion of the finance lease liabilities is included in accrued expenses and other current liabilities, and the long-term portion is included in other long-term liabilities in the Consolidated Balance Sheets.

The components of lease costs are as follows (in thousands):



		Fiscal Quarter Ended			Two Fiscal Quarters Ended
Classification		July 2, 2019			July 2, 2019
Operating lease cost	Occupancy, other restaurant operating costs, and general and administrative expenses	$	10,188		$	20,332
Finance lease cost
Amortization of lease assets	Depreciation and amortization	179			350
Interest on lease liabilities	Interest expense, net	20			40
		10,387			20,722
Sublease income	Franchising royalties and fees, and other	(88		)	(200		)
Total lease cost, net		$	10,299		$	20,522

Future minimum lease payments required under existing leases as of July 2, 2019 are as follows (in thousands):



	Operating Leases		Finance Leases		Total
Remainder of 2019	$	21,533	$	382	$	21,915
2020	42,799		538		43,337
2021	42,316		216		42,532
2022	42,167		44		42,211
2023	40,832		14		40,846
Thereafter	187,239		9		187,248
Total lease payments	376,886		1,203		378,089
Less: Imputed interest	121,203		83		121,286
Present value of lease liabilities	$	255,683	$	1,120	$	256,803

Operating lease payments include $89.0 million related to options to extend lease terms that are reasonably certain of being exercised over the next five years and also include $72.5 million related to operating lease payments during the option period for leases expiring beyond five years, and exclude $6.5 million of legally binding minimum lease payments for leases signed but not yet commenced.

Lease term and discount rate as of the July 2, 2019 are as follows:



	July 2, 2019
Weighted average remaining lease term (years):
Operating	9.4
Finance	2.1
Weighted average discount rate:
Operating	8.68	%
Finance	7.16	%

Supplemental disclosures of cash flow information related to leases for the second quarter and the first two quarters ended July 2, 2019 are as follows (in thousands):



	Fiscal Quarter Ended		Two Fiscal Quarters Ended
	July 2, 2019		July 2, 2019
Cash paid for lease liabilities:
Operating leases	$	10,813	$	21,506
Finance leases	160		377
	$	10,973	$	21,883
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases	$	2,049	$	5,210
Finance leases	179		229
	$	2,228	$	5,439

Leases