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

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

6 Months Ended

Jun. 28, 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 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 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. As of June 28, 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 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. The recognition of rent concessions did not have a material impact on our consolidated financial statements as of June 28, 2020.

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				Twenty-Six Weeks Ended
Lease cost	June 28, 2020		June 30, 2019		June 28, 2020		June 30, 2019
Operating lease cost ^(a)	$	6,634	$	6,378	$	13,228	$	12,564
Variable lease cost	95		298		218		550
	$	6,729	$	6,676	$	13,446	$	13,114

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

Supplemental cash flow disclosures for the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively:



	Twenty-Six Weeks Ended
	June 28, 2020		June 30, 2019
Cash paid for operating lease liabilities	8,517		12,683
Operating lease assets obtained in exchange for operating lease liabilities (a)	(1,351	)	173,949

^(a) The twenty-six weeks ended June 28, 2020 includes a $7.0 million reduction to the operating lease assets and liabilities mainly as a result of shortening the remaining life of certain leases during the first quarter of 2020. The twenty-six weeks ended June 30, 2019 includes the transition adjustment for the adoption of Leases (Topic 842) of $170.3 million as well as a $1.3 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 $0.7 million in deferred lease incentives during the twenty-six weeks ended June 28, 2020 and June 30, 2019, respectively.

Supplemental balance sheet and other lease disclosures:



Operating leases	Classification	June 28, 2020			December 29, 2019
Right-of-use assets	Operating lease assets	$	160,996		$	169,299

Deferred rent payments ^(a)	Operating lease liability	3,593			—
Current lease liabilities	Operating lease liability	11,298			10,307
		14,891			10,307
Non-current lease liabilities	Operating lease liability, less current portion	209,076			214,541
		223,967			224,848
^(a) Majority of the deferred rent payments is payable within the next 12 months

Weighted average remaining lease term (in years)		14.2			15.0
Weighted average discount rate		7.9		%	7.8		%

Future minimum rent payments for our operating leases, excluding the deferred rent payments of $3.6 million, for the next five years as of June 28, 2020 are as follows:



Fiscal year ending:
Remainder of 2020	$	13,672
2021	28,521
2022	27,753
2023	27,625
2024	26,459
Thereafter	243,203
Total minimum lease payments	367,233
Less: imputed interest	146,859
Present value of lease liabilities	$	220,374

As of June 28, 2020, operating lease payments exclude approximately $7.1 million of legally binding minimum lease payments for leases signed but which we have not yet taken possession.