Leases

4 Months Ended

Jan. 19, 2020

Leases [Abstract]

Operating Leases, Lessee

LEASES

Nature of leases — We own restaurant sites and we also lease restaurant sites from third parties. Some of these owned or leased sites are leased and/or subleased to franchisees. Initial terms of our real estate leases are generally 20 years, exclusive of options to renew, which are generally exercisable at our sole discretion for 1 to 20 years. In some instances, our leases have provisions for contingent rentals based upon a percentage of defined revenues. Many of our restaurants also have rent escalation clauses and require the payment of property taxes, insurance, and maintenance costs. Variable lease costs include contingent rent, cost-of-living index adjustments, and payments for additional rent such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. We also lease certain restaurant and office equipment with initial terms generally ranging from 3 to 8 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

As lessor, our leases and subleases primarily consist of restaurants that have been leased to franchisees subsequent to refranchising transactions. The lease descriptions, terms, variable lease payments and renewal options are generally the same as the lessee leases described above. Revenues from leasing arrangements with our franchisees are presented in “Franchise rental revenues” in the accompanying condensed consolidated statements of earnings, and the related expenses are presented in “Franchise occupancy expenses.”

Significant assumptions and judgements — We evaluate the contracts entered into by the Company to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.

The lease term and incremental borrowing rate for each lease requires judgement by management and can impact the classification of our leases as well as the value of our lease assets and liabilities. When determining the lease term, we consider option periods available, and include option periods in the measurement of the lease ROU asset and lease liability where the exercise is reasonably certain to occur. As our leases do not provide an implicit discount rate, we have determined it is appropriate to use our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, in calculating our lease liabilities.

Company as Lessee

Leased assets and liabilities consisted of the following as of January 19, 2020 (in thousands):

	January 19, 2020
Assets:
Operating lease ROU assets	$	884,213
Finance lease ROU assets (1)	2,742
Total ROU assets	$	886,955
Liabilities:
Current operating lease liabilities	$	158,779
Current finance lease liabilities (2)	786
Long term operating lease liabilities	767,819
Long-term finance lease liabilities (2)	2,609
Total lease liabilities	$	929,993

____________________________

(1)Included in “Property and equipment, net” on our condensed consolidated balance sheet.

(2)Included in “Current maturities of long-term debt” and “Long-term debt, net of current maturities” on our condensed consolidated balance sheet.

The following table presents our lease cost components and other supplemental information related to our leases (dollars in thousands):

	Sixteen Weeks Ended
	January 19, 2020
Lease costs:
Finance lease cost:
Amortization of ROU assets (1)	$	234
Interest on lease liabilities (2)	33
Operating lease cost (3)	58,512
Short-term lease cost (3)	1
Variable lease cost (3)(4)	12,507
	$	71,287
Weighted-average remaining lease term (in years):
Finance leases	3.9
Operating leases	8.0
Weighted-average discount rate:
Finance leases	3.4		%
Operating leases	3.9		%

____________________________

(1)Included in “Depreciation and amortization” in our condensed consolidated statement of earnings.

(2)Included in “Interest expense, net” in our condensed consolidated statement of earnings.

(3)Operating lease, short-term and variable lease costs associated with franchisees and company-operated restaurants are included in “Franchise occupancy expenses” and “Occupancy and other”, respectively in our condensed consolidated statement of earnings. For our closed restaurants, these costs are included in “Impairment and other, net” and all other costs are included in “Selling, general and administrative expenses”.

(4)Includes $11.6 million of property taxes and common area maintenance costs which are reimbursed by sub-lessees.

The following table presents as of January 19, 2020, future minimum lease payments for non-cancellable leases (in thousands):

	Finance Leases		Operating Leases
Fiscal year:
Remainder of 2020	$	647	$	130,553
2021	879		193,874
2022	879		153,011
2023	866		124,843
2024	390		94,034
Thereafter	40		386,822
Total minimum lease payments	$	3,701	$	1,083,137
Less: imputed interest	(306)		(156,539)
Present value of lease liability	$	3,395	$	926,598

The following table presents as of September 29, 2019, future minimum lease payments for non-cancellable leases (in thousands):

	Capital Leases		Operating Leases
Fiscal year:
2020	$	879	$	193,313
2021	879		186,226
2022	879		145,794
2023	864		117,753
2024	396		87,420
Thereafter	40		363,505
Total minimum lease payments	$	3,937	$	1,094,011
Less: imputed interest	(343)
Present value of lease liability	$	3,594

The following table includes supplemental cash flow and non-cash information related to our lessee leases (in thousands):

	Sixteen Weeks Ended
	January 19, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	65,996
Operating cash flows from financing leases	$	33
Financing cash flows from financing leases	$	198
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	51,311
Financing leases	$	—

Sale leaseback transactions — In 2020, we completed a sale leaseback transaction of a multi-tenant commercial property in Los Angeles, California and leased back the parcel on which a company-operated restaurant is located. The Company received net proceeds of $17.4 million and recognized a $0.2 million loss on the sale. The initial term on the lease is 20 years and has been accounted for as an operating lease.

In 2020, we completed the sale of one of our corporate office buildings as we move forward with our previously announced consolidation of our headquarters. We entered into a lease with the buyer to leaseback the property for up to 18 months with an option to terminate earlier without penalty, upon providing a 90-day notice. The net proceeds received on the sale was $20.6 million and the lease has been accounted for as an operating lease. A gain on the sale of $10.8 million was recognized during the quarter, and is presented within “Impairment and other charges, net” in our condensed consolidated statement of earnings.

Company as Lessor

The following table presents rental income (in thousands):

	Sixteen Weeks Ended
	January 19, 2020
	Owned Properties		Leased Properties		Total
Operating lease income - franchise	$	6,095	$	66,568	$	72,663
Variable lease income - franchise	2,716		20,704		23,420
Franchise rental revenues	$	8,811	$	87,272	$	96,083
Operating lease income - closed restaurants and other (1)	$	—	$	2,057	$	2,057

____________________________

(1)Primarily relates to closed restaurant properties included in “Impairment and other, net” in our condensed consolidated statement of earnings.

The following table presents as of January 19, 2020, future minimum rental receipts for non-cancellable leases and subleases (in thousands):

	January 19, 2020
Fiscal year:
Remainder of 2020	$	159,654
2021	256,052
2022	232,129
2023	225,488
2024	200,425
Thereafter	1,237,167
Total minimum rental receipts	$	2,310,915

The following table presents as of September 29, 2019, future minimum rental receipts for non-cancellable leases and subleases (in thousands):

	September 29, 2019
Fiscal year:
2020	$	239,219
2021	255,315
2022	231,394
2023	224,605
2024	199,442
Thereafter	1,215,811
Total minimum rental receipts	$	2,365,786

Finance Leases, Lessee

LEASES

Nature of leases — We own restaurant sites and we also lease restaurant sites from third parties. Some of these owned or leased sites are leased and/or subleased to franchisees. Initial terms of our real estate leases are generally 20 years, exclusive of options to renew, which are generally exercisable at our sole discretion for 1 to 20 years. In some instances, our leases have provisions for contingent rentals based upon a percentage of defined revenues. Many of our restaurants also have rent escalation clauses and require the payment of property taxes, insurance, and maintenance costs. Variable lease costs include contingent rent, cost-of-living index adjustments, and payments for additional rent such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. We also lease certain restaurant and office equipment with initial terms generally ranging from 3 to 8 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

As lessor, our leases and subleases primarily consist of restaurants that have been leased to franchisees subsequent to refranchising transactions. The lease descriptions, terms, variable lease payments and renewal options are generally the same as the lessee leases described above. Revenues from leasing arrangements with our franchisees are presented in “Franchise rental revenues” in the accompanying condensed consolidated statements of earnings, and the related expenses are presented in “Franchise occupancy expenses.”

Significant assumptions and judgements — We evaluate the contracts entered into by the Company to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.

The lease term and incremental borrowing rate for each lease requires judgement by management and can impact the classification of our leases as well as the value of our lease assets and liabilities. When determining the lease term, we consider option periods available, and include option periods in the measurement of the lease ROU asset and lease liability where the exercise is reasonably certain to occur. As our leases do not provide an implicit discount rate, we have determined it is appropriate to use our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, in calculating our lease liabilities.

Company as Lessee

Leased assets and liabilities consisted of the following as of January 19, 2020 (in thousands):

	January 19, 2020
Assets:
Operating lease ROU assets	$	884,213
Finance lease ROU assets (1)	2,742
Total ROU assets	$	886,955
Liabilities:
Current operating lease liabilities	$	158,779
Current finance lease liabilities (2)	786
Long term operating lease liabilities	767,819
Long-term finance lease liabilities (2)	2,609
Total lease liabilities	$	929,993

____________________________

(1)Included in “Property and equipment, net” on our condensed consolidated balance sheet.

(2)Included in “Current maturities of long-term debt” and “Long-term debt, net of current maturities” on our condensed consolidated balance sheet.

The following table presents our lease cost components and other supplemental information related to our leases (dollars in thousands):

	Sixteen Weeks Ended
	January 19, 2020
Lease costs:
Finance lease cost:
Amortization of ROU assets (1)	$	234
Interest on lease liabilities (2)	33
Operating lease cost (3)	58,512
Short-term lease cost (3)	1
Variable lease cost (3)(4)	12,507
	$	71,287
Weighted-average remaining lease term (in years):
Finance leases	3.9
Operating leases	8.0
Weighted-average discount rate:
Finance leases	3.4		%
Operating leases	3.9		%

____________________________

(1)Included in “Depreciation and amortization” in our condensed consolidated statement of earnings.

(2)Included in “Interest expense, net” in our condensed consolidated statement of earnings.

(3)Operating lease, short-term and variable lease costs associated with franchisees and company-operated restaurants are included in “Franchise occupancy expenses” and “Occupancy and other”, respectively in our condensed consolidated statement of earnings. For our closed restaurants, these costs are included in “Impairment and other, net” and all other costs are included in “Selling, general and administrative expenses”.

(4)Includes $11.6 million of property taxes and common area maintenance costs which are reimbursed by sub-lessees.

The following table presents as of January 19, 2020, future minimum lease payments for non-cancellable leases (in thousands):

	Finance Leases		Operating Leases
Fiscal year:
Remainder of 2020	$	647	$	130,553
2021	879		193,874
2022	879		153,011
2023	866		124,843
2024	390		94,034
Thereafter	40		386,822
Total minimum lease payments	$	3,701	$	1,083,137
Less: imputed interest	(306)		(156,539)
Present value of lease liability	$	3,395	$	926,598

The following table presents as of September 29, 2019, future minimum lease payments for non-cancellable leases (in thousands):

	Capital Leases		Operating Leases
Fiscal year:
2020	$	879	$	193,313
2021	879		186,226
2022	879		145,794
2023	864		117,753
2024	396		87,420
Thereafter	40		363,505
Total minimum lease payments	$	3,937	$	1,094,011
Less: imputed interest	(343)
Present value of lease liability	$	3,594

The following table includes supplemental cash flow and non-cash information related to our lessee leases (in thousands):

	Sixteen Weeks Ended
	January 19, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	65,996
Operating cash flows from financing leases	$	33
Financing cash flows from financing leases	$	198
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	51,311
Financing leases	$	—

Sale leaseback transactions — In 2020, we completed a sale leaseback transaction of a multi-tenant commercial property in Los Angeles, California and leased back the parcel on which a company-operated restaurant is located. The Company received net proceeds of $17.4 million and recognized a $0.2 million loss on the sale. The initial term on the lease is 20 years and has been accounted for as an operating lease.

In 2020, we completed the sale of one of our corporate office buildings as we move forward with our previously announced consolidation of our headquarters. We entered into a lease with the buyer to leaseback the property for up to 18 months with an option to terminate earlier without penalty, upon providing a 90-day notice. The net proceeds received on the sale was $20.6 million and the lease has been accounted for as an operating lease. A gain on the sale of $10.8 million was recognized during the quarter, and is presented within “Impairment and other charges, net” in our condensed consolidated statement of earnings.

Company as Lessor

The following table presents rental income (in thousands):

	Sixteen Weeks Ended
	January 19, 2020
	Owned Properties		Leased Properties		Total
Operating lease income - franchise	$	6,095	$	66,568	$	72,663
Variable lease income - franchise	2,716		20,704		23,420
Franchise rental revenues	$	8,811	$	87,272	$	96,083
Operating lease income - closed restaurants and other (1)	$	—	$	2,057	$	2,057

____________________________

(1)Primarily relates to closed restaurant properties included in “Impairment and other, net” in our condensed consolidated statement of earnings.

The following table presents as of January 19, 2020, future minimum rental receipts for non-cancellable leases and subleases (in thousands):

	January 19, 2020
Fiscal year:
Remainder of 2020	$	159,654
2021	256,052
2022	232,129
2023	225,488
2024	200,425
Thereafter	1,237,167
Total minimum rental receipts	$	2,310,915

The following table presents as of September 29, 2019, future minimum rental receipts for non-cancellable leases and subleases (in thousands):

	September 29, 2019
Fiscal year:
2020	$	239,219
2021	255,315
2022	231,394
2023	224,605
2024	199,442
Thereafter	1,215,811
Total minimum rental receipts	$	2,365,786

Operating Leases, Lessor

LEASES

Nature of leases — We own restaurant sites and we also lease restaurant sites from third parties. Some of these owned or leased sites are leased and/or subleased to franchisees. Initial terms of our real estate leases are generally 20 years, exclusive of options to renew, which are generally exercisable at our sole discretion for 1 to 20 years. In some instances, our leases have provisions for contingent rentals based upon a percentage of defined revenues. Many of our restaurants also have rent escalation clauses and require the payment of property taxes, insurance, and maintenance costs. Variable lease costs include contingent rent, cost-of-living index adjustments, and payments for additional rent such as real estate taxes, insurance and common area maintenance, which are excluded from the measurement of the lease liability. We also lease certain restaurant and office equipment with initial terms generally ranging from 3 to 8 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

As lessor, our leases and subleases primarily consist of restaurants that have been leased to franchisees subsequent to refranchising transactions. The lease descriptions, terms, variable lease payments and renewal options are generally the same as the lessee leases described above. Revenues from leasing arrangements with our franchisees are presented in “Franchise rental revenues” in the accompanying condensed consolidated statements of earnings, and the related expenses are presented in “Franchise occupancy expenses.”

Significant assumptions and judgements — We evaluate the contracts entered into by the Company to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.

The lease term and incremental borrowing rate for each lease requires judgement by management and can impact the classification of our leases as well as the value of our lease assets and liabilities. When determining the lease term, we consider option periods available, and include option periods in the measurement of the lease ROU asset and lease liability where the exercise is reasonably certain to occur. As our leases do not provide an implicit discount rate, we have determined it is appropriate to use our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, in calculating our lease liabilities.

Company as Lessee

Leased assets and liabilities consisted of the following as of January 19, 2020 (in thousands):

	January 19, 2020
Assets:
Operating lease ROU assets	$	884,213
Finance lease ROU assets (1)	2,742
Total ROU assets	$	886,955
Liabilities:
Current operating lease liabilities	$	158,779
Current finance lease liabilities (2)	786
Long term operating lease liabilities	767,819
Long-term finance lease liabilities (2)	2,609
Total lease liabilities	$	929,993

____________________________

(1)Included in “Property and equipment, net” on our condensed consolidated balance sheet.

(2)Included in “Current maturities of long-term debt” and “Long-term debt, net of current maturities” on our condensed consolidated balance sheet.

The following table presents our lease cost components and other supplemental information related to our leases (dollars in thousands):

	Sixteen Weeks Ended
	January 19, 2020
Lease costs:
Finance lease cost:
Amortization of ROU assets (1)	$	234
Interest on lease liabilities (2)	33
Operating lease cost (3)	58,512
Short-term lease cost (3)	1
Variable lease cost (3)(4)	12,507
	$	71,287
Weighted-average remaining lease term (in years):
Finance leases	3.9
Operating leases	8.0
Weighted-average discount rate:
Finance leases	3.4		%
Operating leases	3.9		%

____________________________

(1)Included in “Depreciation and amortization” in our condensed consolidated statement of earnings.

(2)Included in “Interest expense, net” in our condensed consolidated statement of earnings.

(3)Operating lease, short-term and variable lease costs associated with franchisees and company-operated restaurants are included in “Franchise occupancy expenses” and “Occupancy and other”, respectively in our condensed consolidated statement of earnings. For our closed restaurants, these costs are included in “Impairment and other, net” and all other costs are included in “Selling, general and administrative expenses”.

(4)Includes $11.6 million of property taxes and common area maintenance costs which are reimbursed by sub-lessees.

The following table presents as of January 19, 2020, future minimum lease payments for non-cancellable leases (in thousands):

	Finance Leases		Operating Leases
Fiscal year:
Remainder of 2020	$	647	$	130,553
2021	879		193,874
2022	879		153,011
2023	866		124,843
2024	390		94,034
Thereafter	40		386,822
Total minimum lease payments	$	3,701	$	1,083,137
Less: imputed interest	(306)		(156,539)
Present value of lease liability	$	3,395	$	926,598

The following table presents as of September 29, 2019, future minimum lease payments for non-cancellable leases (in thousands):

	Capital Leases		Operating Leases
Fiscal year:
2020	$	879	$	193,313
2021	879		186,226
2022	879		145,794
2023	864		117,753
2024	396		87,420
Thereafter	40		363,505
Total minimum lease payments	$	3,937	$	1,094,011
Less: imputed interest	(343)
Present value of lease liability	$	3,594

The following table includes supplemental cash flow and non-cash information related to our lessee leases (in thousands):

	Sixteen Weeks Ended
	January 19, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	65,996
Operating cash flows from financing leases	$	33
Financing cash flows from financing leases	$	198
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	51,311
Financing leases	$	—

Sale leaseback transactions — In 2020, we completed a sale leaseback transaction of a multi-tenant commercial property in Los Angeles, California and leased back the parcel on which a company-operated restaurant is located. The Company received net proceeds of $17.4 million and recognized a $0.2 million loss on the sale. The initial term on the lease is 20 years and has been accounted for as an operating lease.

In 2020, we completed the sale of one of our corporate office buildings as we move forward with our previously announced consolidation of our headquarters. We entered into a lease with the buyer to leaseback the property for up to 18 months with an option to terminate earlier without penalty, upon providing a 90-day notice. The net proceeds received on the sale was $20.6 million and the lease has been accounted for as an operating lease. A gain on the sale of $10.8 million was recognized during the quarter, and is presented within “Impairment and other charges, net” in our condensed consolidated statement of earnings.

Company as Lessor

The following table presents rental income (in thousands):

	Sixteen Weeks Ended
	January 19, 2020
	Owned Properties		Leased Properties		Total
Operating lease income - franchise	$	6,095	$	66,568	$	72,663
Variable lease income - franchise	2,716		20,704		23,420
Franchise rental revenues	$	8,811	$	87,272	$	96,083
Operating lease income - closed restaurants and other (1)	$	—	$	2,057	$	2,057

____________________________

(1)Primarily relates to closed restaurant properties included in “Impairment and other, net” in our condensed consolidated statement of earnings.

The following table presents as of January 19, 2020, future minimum rental receipts for non-cancellable leases and subleases (in thousands):

	January 19, 2020
Fiscal year:
Remainder of 2020	$	159,654
2021	256,052
2022	232,129
2023	225,488
2024	200,425
Thereafter	1,237,167
Total minimum rental receipts	$	2,310,915

The following table presents as of September 29, 2019, future minimum rental receipts for non-cancellable leases and subleases (in thousands):

	September 29, 2019
Fiscal year:
2020	$	239,219
2021	255,315
2022	231,394
2023	224,605
2024	199,442
Thereafter	1,215,811
Total minimum rental receipts	$	2,365,786