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. 26, 2021

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 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 September 26, 2021, all of the Company's leases were operating.

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


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
Lease cost	September 26, 2021		September 27, 2020		September 26, 2021		September 27, 2020
Operating lease cost(a)	$	6,388	$	6,500	$	19,263	$	19,523
Variable lease cost	270		143		809		360
	$	6,658	$	6,643	$	20,072	$	19,883

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

Supplemental cash flow disclosures for the thirty-nine weeks ended September 26, 2021 and September 27, 2020, respectively:


	Thirty-Nine Weeks Ended
	September 26, 2021		September 27, 2020
Cash paid for operating lease liabilities(a)	$	28,272	$	15,472
Operating lease assets obtained in exchange for operating lease liabilities(b)	(1,998)		(1,351)

(a) The thirty-nine weeks ended September 26, 2021 includes $6.3 million of termination payments for five of our closed restaurant operating leases.

(b) The thirty-nine weeks ended September 26, 2021 includes a $8.9 million decrease to operating lease assets and liabilities related to the termination of five closed restaurant leases and a purchase of one existing lease, partially offset by a $6.9 million increase mainly due to extending remaining lives of certain leases. The thirty-nine weeks ended September 27, 2020 includes a $7.0 million reduction to the operating lease assets and liabilities as a result of shortening the remaining life of certain leases, partially offset by a $5.7 million increase related to new lease commencements.

The Company recorded no additional deferred lease incentives during the thirty-nine weeks ended September 26, 2021 and $0.2 million during the thirty-nine weeks ended September 27, 2020.

Supplemental balance sheet and other lease disclosures:


Operating leases	Classification	September 26, 2021			December 27, 2020
Right-of-use assets	Operating lease assets	$	149,918		$	159,156

Deferred rent payments	Operating lease liability	795			2,169
Current lease liabilities	Operating lease liability	12,341			12,397
		13,136			14,566

Deferred rent payments	Operating lease liability, less current portion	256			746
Non-current lease liabilities	Operating lease liability, less current portion	191,064			206,855
		191,320			207,601

Total lease liabilities		$	204,456		$	222,167

Weighted average remaining lease term (in years)		13.2			13.8
Weighted average discount rate		7.8		%	7.9%

Future minimum rent payments for our operating leases for the next five years as of September 26, 2021 are as follows:


Fiscal year ending:
Remainder of 2021	$	7,290
2022	27,983
2023	27,464
2024	26,214
2025	25,765
Thereafter	211,509
Total minimum lease payments	326,225
Less: imputed interest	121,769
Present value of lease liabilities	$	204,456

As of September 26, 2021, operating lease payments exclude approximately $6.5 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession.