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. 24, 2023

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 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 24, 2023, 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 24, 2023		September 25, 2022		September 24, 2023		September 25, 2022
Operating lease cost	$	6,019	$	6,072	$	18,060	$	18,426
Variable lease cost	443		358		1,374		1,094
	$	6,462	$	6,430	$	19,434	$	19,520

Supplemental cash flow disclosures and other lease information:


	Thirty-Nine Weeks Ended
	September 24, 2023		September 25, 2022
Cash paid for operating lease liabilities	$	20,520	$	23,377
Operating lease assets obtained in exchange for operating lease liabilities(a)	197		7,724

(a) The thirty-nine weeks ended September 24, 2023 includes a $2.7 million increase due to extending remaining lives of certain leases, partially offset by a $1.9 million decrease as a result of a purchase of an existing operating lease and a $0.6 million decrease as a result of the termination of a closed restaurant lease. The thirty-nine weeks ended September 25, 2022 includes a $7.4 million increase to operating lease assets and liabilities related to new lease commencements, a $2.8 million increase due to extending remaining lives of certain leases, partially offset by a $2.5 million decrease as a result of the termination of closed restaurant leases.

The Company recorded no deferred lease incentives during the thirty-nine weeks ended September 24, 2023 and $1.0 million of deferred lease incentives during the thirty-nine weeks ended September 25, 2022.

Supplemental balance sheet disclosures:


Operating leases	Classification	September 24, 2023			December 25, 2022
Right-of-use assets	Operating lease assets	$	139,491		$	146,920

Deferred rent payments	Operating lease liability	5			84
Current lease liabilities	Operating lease liability	12,548			12,415
		12,553			12,499

Deferred rent payments	Operating lease liability, less current portion	64			68
Non-current lease liabilities	Operating lease liability, less current portion	173,907			183,602
		173,971			183,670

Total lease liabilities		$	186,524		$	196,169

Weighted average remaining lease term (in years)		12.1			12.7
Weighted average discount rate		7.6		%	7.6%

Future minimum rent payments for our operating leases for the next five years as of September 24, 2023 are as follows:


Fiscal year ending:
Remainder of 2023	$	6,502
2024	26,262
2025	26,378
2026	25,468
2027	23,419
Thereafter	176,402
Total minimum lease payments	284,431
Less: imputed interest	97,907
Present value of lease liabilities	$	186,524

As of September 24, 2023, operating lease payments exclude approximately $12.1 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession