Leases

12 Months Ended

Dec. 26, 2021

Leases

Leases

3.    Leases

The Company has significant leases that include most domestic Company-owned restaurant and commissary locations.  Other domestic leases include tractor and trailer leases used by our distribution subsidiary as well as commissary equipment.  Additionally, the Company leases a significant number of restaurants within the United Kingdom; these restaurants are then subleased to the franchisees.  The Company’s leases have terms as follows:

	Average lease term
Domestic Company-owned restaurants	Five years, plus at least one renewal
United Kingdom franchise-owned restaurants	15 years
Domestic commissary locations	10 years, plus at least one renewal
Domestic and international tractors and trailers	Five to seven years
Domestic and international commissary and office equipment	Three to five years

The Company determines if an arrangement is or contains a lease at contract inception and recognizes a right-of-use asset and a lease liability at the lease commencement date.  Leases with an initial term of 12 months or less but greater than one month are not recorded on the balance sheet for select asset classes.  The lease liability is measured at the present value of future lease payments as of the lease commencement date.  The right-of-use asset recognized is based on the lease liability adjusted for prepaid and deferred rent and unamortized lease incentives.  An operating lease right-of-use asset is amortized on a straight-line basis over the lease term and is recognized as a single lease cost against the operating lease liability.  A finance lease right-of-use asset is amortized on a straight-line basis, with interest costs reported separately, over the lesser of the useful life of the leased asset or lease term.  Operating lease expense is recognized on a straight-line basis over the lease term and is included in Operating costs or General and administrative expenses.  Variable lease payments are expensed as incurred.

The Company uses its incremental borrowing rates as the discount rate for its leases, which is equal to the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.  The lease terms for all the Company’s leases include the contractually obligated period of the leases, plus any additional periods covered by Company options to extend the leases that the Company is reasonably certain to exercise.

Certain leases provide that the lease payments may be increased annually based on the fixed rate terms or adjustable terms such as the Consumer Price Index.  Future base rent escalations that are not contractually quantifiable as of the lease commencement date are not included in our lease liability.

The following schedule details the total right-of-use assets and lease liabilities on the Consolidated Balance Sheets as of December 26, 2021 and December 27, 2020 (in thousands):

			December 26,		December 27,
Leases	Classification		2021		2020
Assets
Finance lease assets, net	Finance lease right-of-use assets, net	$	20,907	$	16,840
Operating lease assets, net	Operating lease right-of-use assets		176,256		148,110
Total lease assets		$	197,163	$	164,950
Liabilities
Current finance lease liabilities	Current finance lease liabilities	$	4,977	$	3,545
Current operating lease liabilities	Current operating lease liabilities		22,543		23,538
Noncurrent finance lease liabilities	Long-term finance lease liabilities		16,580		13,531
Noncurrent operating lease liabilities	Long-term operating lease liabilities		160,672		124,666
Total lease liabilities		$	204,772	$	165,280

Lease expense for lease payments is recognized on a straight-line basis over the lease term.  Lease expense is comprised of operating and finance lease costs, short-term lease costs, and variable lease costs, which primarily include common area maintenance, real estate taxes, and insurance for the Company’s real estate leases.  Lease costs also include variable rent, which is primarily related to the Company’s supply chain tractor and trailer leases that are based on a rate per mile.  Lease expense for the years ended December 26, 2021 and December 27, 2020 are as follows:

		Year Ended		Year Ended
(in thousands)		December 26, 2021		December 27, 2020
Finance lease:
Amortization of right-of-use assets	$	4,980	$	2,342
Interest on lease liabilities		1,140		606
Operating lease:
Operating lease cost		43,072		40,026
Short-term lease cost		2,032		3,960
Variable lease cost		8,572		6,503
Total lease costs	$	59,796	$	53,437
Sublease income		(12,039)		(10,407)
Total lease costs, net of sublease income	$	47,757	$	43,030

Future minimum lease payments under contractually-obligated leases and associated sublease income as of December 26, 2021 are as follows (in thousands):

Fiscal Year	Finance Lease Costs		Operating Lease Costs		Expected Sublease Income
2022	$	5,969	$	33,323	$	10,704
2023		5,919		32,174		10,515
2024		4,872		31,069		10,302
2025		3,242		26,794		9,835
2026		2,265		22,727		9,107
Thereafter		1,748		96,187		44,700
Total future minimum lease payments	$	24,015	$	242,274	$	95,163
Less imputed interest		(2,458)		(59,059)		—
Total present value of lease liabilities	$	21,557	$	183,215	$	95,163

Lessor Operating Leases

We sublease certain retail space to our franchisees in the United Kingdom which are primarily operating leases.  At December 26, 2021, we leased and subleased approximately 425 Papa John’s restaurants to franchisees in the United Kingdom.  The initial lease terms on the franchised sites in the United Kingdom are generally 15 years.  The Company has the option to negotiate an extension toward the end of the lease term at the landlord’s discretion.  Rental income, primarily derived from properties leased and subleased to franchisees in the United Kingdom, is recognized on a straight-line basis over the respective operating lease terms.

Lease Guarantees

As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 70 domestic leases. These leases have varying terms, the latest of which expires in 2036.  As of December 26, 2021, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $11.5 million.  This contingent liability is not included in the Consolidated Balance Sheet or future minimum lease obligation.  The fair value of the guarantee is not material.

There were no leases recorded between related parties.

Supplemental Cash Flow & Other Information

Supplemental cash flow information related to leases for the years ended December 26, 2021 and December 27, 2020 are as follows:

	Year Ended
(in thousands)	December 26, 2021		December 27, 2020		December 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	1,140	$	606	$	269
Financing cash flows from finance leases		4,566		2,139		781
Operating cash flows from operating leases (a)		38,530		37,113		40,152
Right-of-use assets obtained in exchange for new finance lease liabilities		9,486		9,152		10,199
Right-of-use assets obtained in exchange for new operating lease liabilities (b)		64,420		30,266		20,903
Cash received from sublease income		11,597		10,545		10,139
Weighted-average remaining lease term (in years):
Finance leases		4.51		4.71		4.75
Operating leases		8.30		7.00		7.00
Weighted-average discount rate:
Finance leases		5.08%		5.34%		6.38%
Operating leases		6.20%		6.65%		6.94%
(a) Included within the change in Other assets and liabilities within the Consolidated Statements of Cash Flows offset by non-cash operating lease right-of-use asset amortization and lease liability accretion.
(b) Includes right-of-use assets of approximately $21.8 million for the year ended December 26, 2021 associated with the lease commencement of our Atlanta, Georgia corporate office.