Chuy's Holdings, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

9 Months Ended

Sep. 29, 2019

Leases

The Company determines if a contract contains a lease at inception. The Company's material long-term operating lease agreements are for the land and buildings for our restaurants as well as our corporate offices. The lease term begins on the date that the Company takes possession under the lease, including the pre-opening period during construction, when in many cases the Company is not making rent payments. The initial lease terms range from 10 years to 15 years, most of which include renewal options of 10 to 15 years. The lease term is generally the minimum of the noncancelable period or the lease term including renewal options which are reasonably certain of being exercised up to a term of approximately 20 years.

Operating lease assets and liabilities are recognized at the lease commencement date for material leases with a term of greater than 12 months. Operating lease liabilities represent the present value of future minimum lease payments. Since our leases do not provide an implicit rate, our operating lease liabilities are calculated using the Company's secured incremental borrowing rate at lease commencement. We have no outstanding debt, and as a result, we estimate this rate based on prevailing financial market conditions, comparable companies, credit analysis and management judgment. Minimum lease payments include only fixed lease components of the agreement, as well as variable rate payments that depend on an index, initially measured using the index at the lease commencement date.

Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepaid or accrued lease payments, initial direct costs and lease incentives. Lease incentives are recognized when earned and reduce our operating lease asset. They are amortized through the operating lease assets as reductions of rent expense over the lease term.

Operating lease expense is recognized on a straight-line basis over the lease term. Variable lease payments that do not depend on a rate or index, escalation in the index subsequent to the initial measurement, payments associated with non-lease components such as common area maintenance, real estate taxes and insurance, and short-term lease payments (leases with a term with 12 months or less) are expensed as incurred. Certain of the Company’s operating leases contain clauses that provide for contingent rent based on a percentage of sales greater than certain specified target amounts. These variable payments are expensed when the achievement of the specified target that triggers the contingent rent is considered probable. Rent expense is paid to various landlords including several companies owned and controlled by the Company’s founders and one of its former executive officers. As of September 29, 2019, all of the Company's leases were operating.

Components of operating lease costs are included in the occupancy, general and administrative expense and property and equipment, net:



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 29, 2019						September 29, 2019
Lease cost	Unrelated Parties		Related Party		Total		Unrelated Parties		Related Party		Total
Operating lease cost ^(a)	$	5,647	$	576	$	6,223	$	16,654	$	1,728	$	18,382
Variable lease cost	160		155		315		382		483		865
	$	5,807	$	731	$	6,538	$	17,036	$	2,211	$	19,247

^(a) Includes short-term operating lease costs which are immaterial.

Supplemental cash flow disclosures and other lease information for the thirteen weeks ended September 29, 2019:



Cash paid for operating lease liabilities	19,177
Operating lease assets obtained in exchange for operating lease liabilities (a)	176,511
Weighted average remaining lease term (in years)	15.3
Weighted average discount rate	7.8	%

^(a) Includes the transition adjustment for the adoption of Leases (Topic 842) as discussed in Note 2, Recent Accounting Pronouncements in the notes to our unaudited condensed consolidated financial statements. As a result of the store closures, the Company also shortened the remaining life of the related leases and recorded a $1.3 million reduction to the operating lease assets and liabilities during the first quarter of 2019.

Supplemental balance sheet disclosures:



Operating leases	Classification	September 29, 2019
Right-of-use assets	Operating lease assets	$	170,618

Current lease liabilities	Operating lease liability	$	9,705
Non-current lease liabilities	Operating lease liability, less current portion	216,010
Total lease liabilities		$	225,715

Future minimum rent payments for our operating leases for each of the next five years as of September 29, 2019 are as follows:



	Unrelated Parties		Related Party		Total
Fiscal year ending:
Remainder of 2019	$	6,029	$	570	$	6,599
2020	24,565		2,286		26,851
2021	24,932		2,292		27,224
2022	24,775		1,439		26,214
2023	25,143		1,446		26,589
Thereafter	274,363		1,205		275,568
Total minimum lease payments	379,807		9,238		389,045
Less: imputed interest	161,852		1,478		163,330
Present value of lease liabilities	$	217,955	$	7,760	$	225,715

As of September 29, 2019, operating lease payments exclude approximately $15.8 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession.

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, future minimum rent payments for our operating leases for each of the next five years and in total are as follows as of December 30, 2018:



	Unrelated Parties		Related Party		Total
Fiscal year ending:
2019	$	23,638	$	2,279	$	25,917
2020	25,184		2,286		27,470
2021	25,620		2,292		27,912
2022	25,463		1,439		26,902
2023	25,832		1,446		27,278
Thereafter	294,112		1,205		295,317
Total minimum lease payments	$	419,849	$	10,947	$	430,796

The above future minimum rental amounts exclude the amortization of deferred lease incentives, renewal options that are not reasonably assured of renewal, and contingent rent. The Company generally has escalating rents over the term of the leases and records rent expense on a straight-line basis.