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

Annual report pursuant to Section 13 and 15(d)

Leases

Leases

12 Months Ended

Dec. 27, 2020

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 the 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 totaling 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 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 construction milestones are met 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. As of December 27, 2020, all of the Company's leases were operating.

During the second quarter of 2020, the Company suspended lease payments for the months of April through June 2020 as a result of the COVID-19 pandemic. The Company was able to negotiate rent concessions, abatements and deferrals with landlords on a large portion of our operating leases. Financial Accounting Standards Board ("FASB") issued a clarification to accounting for lease concessions in response to the COVID-19 pandemic to reduce the operational challenges and complexity of lease accounting. The Company used the relief provisions provided by FASB and made an election to account for the lease concessions as if they were part of the original lease agreement. As a result of these negotiations, the Company recorded $2.9 million of deferred rent as part of our operating lease liability as of December 27, 2020. The recognition of rent concessions did not have a material impact on our consolidated financial statements.

Components of operating lease costs are included in occupancy, closed restaurant costs, restaurant pre-opening, general and administrative expense and property and equipment, net:


	Year Ended
Lease cost	December 27, 2020		December 29, 2019
Operating lease cost (a)	$	26,419	$	25,478
Variable lease cost	515		1,103
	$	26,934	$	26,581

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

Supplemental cash flow disclosures and other lease information :


	Year Ended
	December 27, 2020	December 29, 2019
Cash paid for operating lease liabilities	23,021	25,781
Operating lease assets obtained in exchange for operating lease liabilities (a)	3,845	177,701

(a) The year-ended December 27, 2020 includes a $5.6 million reduction to the operating lease assets and liabilities mainly as a result of shortening the remaining life of certain leases as well as a $9.4 million increase due to new lease commencements. The

year-ended December 29, 2019 includes the transition adjustment for the adoption of Leases (Topic 842) of $170.3 million, new lease commencements of $11.7 million as well as a $4.3 million reduction to the operating lease assets and liabilities as a result of shortening the remaining life of certain leases.

The Company recorded $0.2 million and $0.9 million in deferred lease incentives during the fiscal year ended December 27, 2020 and December 29, 2019, respectively.

Supplemental balance sheet disclosures:


Operating leases	Classification	December 27, 2020			December 29, 2019
Right-of-use assets	Operating lease assets	$	159,156		$	169,299

Deferred Rent Payments	Operating lease liability	2,169			—
Current lease liabilities	Operating lease liability	12,397			10,307
		14,566			10,307

Deferred Rent Payments	Operating lease liability, less current portion	746			—
Non-current lease liabilities	Operating lease liability, less current portion	206,855			214,541
		207,601			214,541

Total lease liabilities		$	222,167		$	224,848

Weighted average remaining lease term (in years)		13.8			15.0
Weighted average discount rate		7.9		%	7.8		%

Future minimum rent payments for our operating leases for each of the next five years as of December 27, 2020 are as follows:


Fiscal years ending:
2021	$	31,161
2022	28,775
2023	28,223
2024	26,936
2025	26,522
Thereafter	220,521
Total minimum lease payments	362,138
Less: imputed interest	139,971
Present value of lease liabilities	$	222,167

As of December 27, 2020, operating lease payments exclude approximately $2.1 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession.