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Leases

12 Months Ended

Dec. 25, 2022

3. Leases

The Company has significant leases that include most Domestic Company-owned restaurant and commissary locations as well as our corporate office located in Atlanta, Georgia. 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 (“UK”); 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
UK 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 25, 2022 and December 26, 2021 (in thousands):


Leases	Classification	December 25, 2022		December 26, 2021
Assets
Finance lease assets, net	Finance lease right-of-use assets, net	$	24,941	$	20,907
Operating lease assets, net	Operating lease right-of-use assets	172,425		176,256
Total lease assets		$	197,366	$	197,163
Liabilities
Current finance lease liabilities	Current finance lease liabilities	$	6,850	$	4,977
Current operating lease liabilities	Current operating lease liabilities	23,418		22,543
Noncurrent finance lease liabilities	Long-term finance lease liabilities	19,022		16,580
Noncurrent operating lease liabilities	Long-term operating lease liabilities	160,905		160,672
Total lease liabilities		$	210,195	$	204,772

Lease costs for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 were as follows (in thousands):


	Year Ended December 25, 2022		Year Ended December 26, 2021		Year Ended December 27, 2020
Finance lease:
Amortization of right-of-use assets	$	5,704	$	4,980	$	2,342
Interest on lease liabilities	1,029		1,140		606
Operating lease:
Operating lease cost	42,815		43,072		40,026
Short-term lease cost	4,171		2,032		3,960
Variable lease cost	9,129		8,572		6,503
Total lease costs	62,848		59,796		53,437
Sublease income	(11,654)		(12,039)		(10,407)
Total lease costs, net of sublease income	$	51,194	$	47,757	$	43,030

Future minimum lease payments under contractually-obligated leases and associated sublease income as of December 25, 2022 were as follows (in thousands):


Fiscal Year	Finance Lease Costs		Operating Lease Costs		Expected Sublease Income
2023	$	7,849	$	32,860	$	10,303
2024	6,801		32,267		10,371
2025	5,171		30,695		9,952
2026	4,125		26,973		9,251
2027	2,971		21,568		8,523
Thereafter	1,440		92,002		42,089
Total future minimum lease payments	28,357		236,365		90,489
Less imputed interest	(2,485)		(52,042)		—
Total present value of lease liabilities	$	25,872	$	184,323	$	90,489

Lessor Operating Leases

The Company subleases certain retail space to our franchisees in the UK which are primarily operating leases. At December 25, 2022, we leased and subleased approximately 442 Papa John’s restaurants to franchisees in the UK. The initial lease terms on the franchised sites in the UK 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. The initial lease terms of the franchisee subleases are generally five to ten years. Rental income, primarily derived from properties leased and subleased to franchisees in the UK, is recognized on a straight-line basis over the respective operating lease terms. The Company recognized total sublease income of $11.7 million, $12.0 million and $10.4 million for the years ended December 25, 2022, December 26, 2021 and December 27, 2020, respectively, within Other revenues in the Consolidated Statements of Operations.

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 53 Domestic leases. These leases have varying terms, the latest of which expires in 2036. As of December 25, 2022, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $9.2 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

The following table presents supplemental cash flow information related to leases for the years ended December 25, 2022, December 26, 2021 and December 27, 2020:


(Dollars in thousands)	Year Ended
	December 25, 2022		December 26, 2021		December 27, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	1,029	$	1,140	$	606
Financing cash flows from finance leases	$	5,416	$	4,566	$	2,139
Operating cash flows from operating leases (a)	$	35,573	$	38,530	$	37,113
Right-of-use assets obtained in exchange for new finance lease liabilities	$	9,875	$	9,486	$	9,152
Right-of-use assets obtained in exchange for new operating lease liabilities (b)	$	53,869	$	64,420	$	30,266
Cash received from sublease income	$	10,847	$	11,597	$	10,545

Weighted-average remaining lease term (in years):
Finance leases	4.43		4.51		4.71
Operating leases	8.44		8.30		7.00
Weighted-average discount rate:
Finance leases	4.59%		5.08%		5.34%
Operating leases	5.63%		6.20%		6.65%

______________________________

(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 25, 2021 associated with the lease commencement of our Atlanta, Georgia corporate office.

Leases

3. Leases


						Average lease term
Domestic Company-owned restaurants						Five years, plus at least one renewal
UK 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 following schedule details the total right-of-use assets and lease liabilities on the Consolidated Balance Sheets as of December 25, 2022 and December 26, 2021 (in thousands):


Leases	Classification	December 25, 2022		December 26, 2021
Assets
Finance lease assets, net	Finance lease right-of-use assets, net	$	24,941	$	20,907
Operating lease assets, net	Operating lease right-of-use assets	172,425		176,256
Total lease assets		$	197,366	$	197,163
Liabilities
Current finance lease liabilities	Current finance lease liabilities	$	6,850	$	4,977
Current operating lease liabilities	Current operating lease liabilities	23,418		22,543
Noncurrent finance lease liabilities	Long-term finance lease liabilities	19,022		16,580
Noncurrent operating lease liabilities	Long-term operating lease liabilities	160,905		160,672
Total lease liabilities		$	210,195	$	204,772

Lease costs for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 were as follows (in thousands):


	Year Ended December 25, 2022		Year Ended December 26, 2021		Year Ended December 27, 2020
Finance lease:
Amortization of right-of-use assets	$	5,704	$	4,980	$	2,342
Interest on lease liabilities	1,029		1,140		606
Operating lease:
Operating lease cost	42,815		43,072		40,026
Short-term lease cost	4,171		2,032		3,960
Variable lease cost	9,129		8,572		6,503
Total lease costs	62,848		59,796		53,437
Sublease income	(11,654)		(12,039)		(10,407)
Total lease costs, net of sublease income	$	51,194	$	47,757	$	43,030

Future minimum lease payments under contractually-obligated leases and associated sublease income as of December 25, 2022 were as follows (in thousands):


Fiscal Year	Finance Lease Costs		Operating Lease Costs		Expected Sublease Income
2023	$	7,849	$	32,860	$	10,303
2024	6,801		32,267		10,371
2025	5,171		30,695		9,952
2026	4,125		26,973		9,251
2027	2,971		21,568		8,523
Thereafter	1,440		92,002		42,089
Total future minimum lease payments	28,357		236,365		90,489
Less imputed interest	(2,485)		(52,042)		—
Total present value of lease liabilities	$	25,872	$	184,323	$	90,489

Lessor Operating Leases

Lease Guarantees

There were no leases recorded between related parties.

Supplemental Cash Flow & Other Information

The following table presents supplemental cash flow information related to leases for the years ended December 25, 2022, December 26, 2021 and December 27, 2020:


(Dollars in thousands)	Year Ended
	December 25, 2022		December 26, 2021		December 27, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	1,029	$	1,140	$	606
Financing cash flows from finance leases	$	5,416	$	4,566	$	2,139
Operating cash flows from operating leases (a)	$	35,573	$	38,530	$	37,113
Right-of-use assets obtained in exchange for new finance lease liabilities	$	9,875	$	9,486	$	9,152
Right-of-use assets obtained in exchange for new operating lease liabilities (b)	$	53,869	$	64,420	$	30,266
Cash received from sublease income	$	10,847	$	11,597	$	10,545

Weighted-average remaining lease term (in years):
Finance leases	4.43		4.51		4.71
Operating leases	8.44		8.30		7.00
Weighted-average discount rate:
Finance leases	4.59%		5.08%		5.34%
Operating leases	5.63%		6.20%		6.65%

______________________________

(b)Includes right-of-use assets of approximately $21.8 million for the year ended December 25, 2021 associated with the lease commencement of our Atlanta, Georgia corporate office.

Leases

3. Leases


						Average lease term
Domestic Company-owned restaurants						Five years, plus at least one renewal
UK 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 following schedule details the total right-of-use assets and lease liabilities on the Consolidated Balance Sheets as of December 25, 2022 and December 26, 2021 (in thousands):


Leases	Classification	December 25, 2022		December 26, 2021
Assets
Finance lease assets, net	Finance lease right-of-use assets, net	$	24,941	$	20,907
Operating lease assets, net	Operating lease right-of-use assets	172,425		176,256
Total lease assets		$	197,366	$	197,163
Liabilities
Current finance lease liabilities	Current finance lease liabilities	$	6,850	$	4,977
Current operating lease liabilities	Current operating lease liabilities	23,418		22,543
Noncurrent finance lease liabilities	Long-term finance lease liabilities	19,022		16,580
Noncurrent operating lease liabilities	Long-term operating lease liabilities	160,905		160,672
Total lease liabilities		$	210,195	$	204,772

Lease costs for the years ended December 25, 2022, December 26, 2021 and December 27, 2020 were as follows (in thousands):


	Year Ended December 25, 2022		Year Ended December 26, 2021		Year Ended December 27, 2020
Finance lease:
Amortization of right-of-use assets	$	5,704	$	4,980	$	2,342
Interest on lease liabilities	1,029		1,140		606
Operating lease:
Operating lease cost	42,815		43,072		40,026
Short-term lease cost	4,171		2,032		3,960
Variable lease cost	9,129		8,572		6,503
Total lease costs	62,848		59,796		53,437
Sublease income	(11,654)		(12,039)		(10,407)
Total lease costs, net of sublease income	$	51,194	$	47,757	$	43,030

Future minimum lease payments under contractually-obligated leases and associated sublease income as of December 25, 2022 were as follows (in thousands):


Fiscal Year	Finance Lease Costs		Operating Lease Costs		Expected Sublease Income
2023	$	7,849	$	32,860	$	10,303
2024	6,801		32,267		10,371
2025	5,171		30,695		9,952
2026	4,125		26,973		9,251
2027	2,971		21,568		8,523
Thereafter	1,440		92,002		42,089
Total future minimum lease payments	28,357		236,365		90,489
Less imputed interest	(2,485)		(52,042)		—
Total present value of lease liabilities	$	25,872	$	184,323	$	90,489

Lessor Operating Leases

Lease Guarantees

There were no leases recorded between related parties.

Supplemental Cash Flow & Other Information

The following table presents supplemental cash flow information related to leases for the years ended December 25, 2022, December 26, 2021 and December 27, 2020:


(Dollars in thousands)	Year Ended
	December 25, 2022		December 26, 2021		December 27, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	1,029	$	1,140	$	606
Financing cash flows from finance leases	$	5,416	$	4,566	$	2,139
Operating cash flows from operating leases (a)	$	35,573	$	38,530	$	37,113
Right-of-use assets obtained in exchange for new finance lease liabilities	$	9,875	$	9,486	$	9,152
Right-of-use assets obtained in exchange for new operating lease liabilities (b)	$	53,869	$	64,420	$	30,266
Cash received from sublease income	$	10,847	$	11,597	$	10,545

Weighted-average remaining lease term (in years):
Finance leases	4.43		4.51		4.71
Operating leases	8.44		8.30		7.00
Weighted-average discount rate:
Finance leases	4.59%		5.08%		5.34%
Operating leases	5.63%		6.20%		6.65%

______________________________

(b)Includes right-of-use assets of approximately $21.8 million for the year ended December 25, 2021 associated with the lease commencement of our Atlanta, Georgia corporate office.