Leasing Arrangements

9 Months Ended

Sep. 30, 2019

Leasing Arrangements

The Company is the lessee in a significant real estate portfolio, primarily through ground leases (the Company leases the land and generally owns the building) and through improved leases (the Company leases the land and buildings). The Company determines whether an arrangement is a lease at inception. Lease terms for most restaurants, where market conditions allow, are generally for 20 years and, in many cases, provide for rent escalations and renewal options. Renewal options are typically solely at the Company’s discretion. Escalation terms vary by market with examples including fixed-rent escalations, escalations based on an inflation index and fair-value market adjustments. The timing of these escalations generally range from annually to every five years.

The following table provides detail of rent expense:




	Quarters Ended				Nine Months Ended
	September 30,				September 30,
In millions	2019		2018		2019		2018

Restaurants	$	387.0	$	360.7	$	1,144.9	$	1,078.8
Other	19.8		21.7		57.7		65.9
Total rent expense	$	406.8	$	382.4	$	1,202.6	$	1,144.7

Rent expense included percent rents in excess of minimum rents (in millions) as follows - Quarter ended: 2019 - $74.2; 2018 - $79.4. Nine months ended: 2019 - $204.7; 2018 - $224.1.

The amount of the Right of Use Asset and Lease Liability recorded at transition included known escalations and renewal option periods reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the sales performance of the restaurant remains strong. Therefore, the Right of Use Asset and Lease Liability include an assumption on renewal options that have not yet been exercised by the Company, and are not currently a future obligation.

The Company has elected not to separate non-lease components from lease components in our lessee portfolio. To the extent that occupancy costs, such as site maintenance, are included in the Asset and Liability, the impact is immaterial and is generally limited to Company-owned restaurant locations. For franchised locations, which represent the majority of the restaurant portfolio, the related occupancy costs including property taxes, insurance and site maintenance are generally required to be paid by the franchisees as part of the franchise arrangement.

In addition, the Company is the lessee under non-restaurant related leases such as office buildings, vehicles and office equipment. These leases are not a material subset of the Company’s lease portfolio.

As the rate implicit in each lease is not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. The weighted average discount rate used for operating leases was 4.0% as of September 30, 2019.

As of September 30, 2019, maturities of lease liabilities for our operating leases were as follows:



In millions	Total *
2019	$	287.3
2020	1,117.9
2021	1,080.7
2022	1,037.1
2023	998.2
Thereafter	13,795.9
Total lease payments	$	18,317.1
Less: imputed interest	(5,732.0		)
Present value of lease liability	$	12,585.1


*	Total lease payments include option periods that are reasonably assured of being exercised.

As of September 30, 2019, Weighted Average Lease Term remaining that is included in the maturities of lease liabilities was 20 years.

As of December 31, 2018, future minimum payments required under existing operating leases with initial terms of one year or more were:



In millions	Restaurant			Other		Total *
2019		$	1,093.4	$	51.3	$	1,144.7
2020		1,032.1		51.0		1,083.1
2021		955.5		45.7		1,001.2
2022		873.8		35.7		909.5
2023		806.0		24.6		830.6
Thereafter		7,132.3		164.9		7,297.2
Total minimum payments		$	11,893.1	$	373.2	$	12,266.3

Future minimum payments exclude option periods that have not yet been exercised.