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Leases
 9 Months Ended
Sep. 30, 2022
Leases [Abstract]  
Leases NOTE 8 — Leases
Adoption of ASC 842
The Company adopted ASC 842, as amended, using the modified retrospective transition method with an effective date of January 1, 2022. The modified retrospective approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. As such, results for reporting periods beginning on or after January 1, 2022 are presented under ASC 842. Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 840 (ASC 840). Further, disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2022. The adoption of the lease standard resulted in a cumulative adjustment to opening equity of $0.4 million, as provided in the table below.
Subsequent to the Company’s January 1, 2022 adoption of the lease standard, the Company continued to review relevant lease contract elements and improve business processes, which resulted in adjustments to the Company’s adoption entries and presentation. The impacts of the adjustments were recorded in the nine months ended September 30, 2022, and are presented in the table below and in the condensed consolidated financial statements.
Upon adoption, the Company recognized operating lease liabilities of $152.8 million based on the present value of the remaining lease payments for existing operating leases, and right-of-use assets of $150.7 million, net of reductions for the impacts of deferred rents. As part of the transition, the Company derecognized all landlord funded lease incentives and deemed landlord financing liabilities, including capital assets related to previous sale and leaseback transactions which were remeasured under ASC 842.
The standard provides several optional practical expedients in transition. The Company elected the package of practical expedients, which permits it to not reassess, under the new standard, the Company's prior conclusions about lease identification, lease classification and initial direct costs. As such, the Company applied the modified retrospective transition method as of the adoption date to those lease contracts for which it had taken possession of the property as of January 1, 2022.
The Company also elected the practical expedient pertaining to land easements and did not elect the practical expedient related to use-of-hindsight. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption and also the practical expedient to not separate lease and non-lease components for all its leases.
Upon transition, the Company recorded the following increases (decreases) to the respective line items on its condensed consolidated balance sheet:
(in thousands)
Adjustments as of January 1, 2022
(As Reported)
Subsequent Adjustments Cumulative Adjustments as of September 30, 2022
(As Corrected)
Property and equipment, net$(79,821)$(6,171)$(85,992)
Finance lease right-of-use assets111,826 3,745 115,571 
Operating lease right-of-use assets150,689 — 150,689 
Deferred rent(3,153)— (3,153)
Current portion of finance lease obligations607 — 607 
Current portion of operating lease obligations8,430 — 8,430 
Current portion of long-term debt(46)— (46)
Finance lease obligations, net of current portion32,534 — 32,534 
Operating lease obligations, net of
current portion		144,405 — 144,405 
Long-term debt, net of current portion(1,426)(1,506)(2,932)
Accumulated deficit386 (264)122 
Non-controlling interests957 (656)301 
Nature of Leases
The Company leases all of its domestic company-operated shops, warehouse facilities, headquarters buildings, and certain equipment under various non-cancelable lease agreements that expire on various dates through 2041. The Company evaluates contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. The Company evaluates whether it controls the use of the asset, which is determined by assessing whether it obtains substantially all economic benefits from the use of the asset, and whether the Company has the right to direct the use of the asset. If these criteria are met, a lease has been identified and has a term greater than one year, the Company accounts for the contract under the requirements of ASC 842.
Lease commencement is determined when the Company takes possession of a leased asset, at which time the Company also determines the lease classification as an operating or finance lease. The Company’s real estate leases consist of commercial ground leases (land only) and build-to-suit leases (land and building).
The real estate leases are a combination of both operating and finance leases, depending on evaluation of the lease terms. Generally, the Company’s real estate leases have an initial term of 15 years and typically include two to three renewal options of five-years each. These renewal options are included in the lease term when it is reasonably certain that the option will be exercised. For commercial ground leases, one five-year renewal is included in the Company’s initial lease term calculations. The Company’s real estate leases typically provide for fixed minimum rent payments. For operating leases, the Company recognizes lease expense on a straight-line basis over the lease term from the date the Company takes possession of the leased property. Lease expense incurred before a lease commences is included in the calculation of the right-of-use asset. Once a lease commences, the Company records lease expense in cost of sales on the Company’s condensed consolidated statements of operations. Variable lease costs generally include payments for additional rent such as real estate taxes, insurance, and common area maintenance, and are excluded from the measurement of the lease liability. Variable lease costs are included in cost of sales on the condensed consolidated statements of operations.
The Company calculates right-of-use assets and lease liabilities based on the present value of the fixed lease payments, including any estimated lease incentives, at lease commencement using its incremental borrowing rate, applied on a portfolio basis. As the rate implicit in the Company’s leases cannot be readily determined, the discount rate used to measure the lease liability is equal to the rate the Company would pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
The Company expends cash for leasehold improvements to build out and equip its leased premises. For certain leases, a portion of the leasehold improvements and building costs are reimbursed by landlords as landlord incentives pursuant to agreed-upon terms in the Company’s lease agreements. Landlord incentives, if obtained, are received in cash after the Company takes possession of the property, and as the Company meets required milestones during the construction of the property. The Company includes these amounts in the measurement of the initial right-of-use asset and lease liability.
A summary of finance and operating lease right-of-use assets and lease liabilities as of September 30, 2022 is as follows:
(in thousands)Balance Sheet ClassificationSeptember 30, 2022
Right-of-use assets
Finance leasesFinance lease right-of-use assets, net$214,903 
Operating leasesOperating lease right-of-use assets, net165,682 
Total right-of-use assets$380,585 
Lease liabilities
Finance leasesCurrent portion of finance lease obligations$7,004 
 Finance lease obligations, net of current portion209,257 
Operating leasesCurrent portion of operating lease obligations9,462 
 Operating lease obligations, net of current portion157,319 
Total lease liabilities $383,042 
The components of lease cost were as follows for the periods presented:
(in thousands)Statement of Operations ClassificationThree Months Ended September 30, 2022Nine Months Ended September 30, 2022
Finance lease cost
Amortization of right-of-use assetsCost of sales$3,121 $7,919 
Interest on lease liabilitiesInterest expense2,482 6,261 
Total finance lease cost5,603 14,180 
Operating lease costCost of sales4,228 12,109 
  
Variable lease costCost of sales566 1,625 
Total lease cost$10,397 $27,914 
Future minimum lease payments for finance and operating lease liabilities as of September 30, 2022 were as follows:
(in thousands)FinanceOperating
Remainder of 2022$4,882 $4,363 
202317,527 15,601 
202418,185 15,291 
202518,417 15,009 
202618,741 14,868 
Thereafter246,068 161,592 
Total$323,820 $226,724 
Less: imputed interest(107,559)(59,943)
Present value of minimum lease payments216,261 166,781 
Less: current portion(7,004)(9,462)
Lease liabilities, net of current portion$209,257 $157,319 
Future minimum lease payments under noncancellable operating leases and capital lease liabilities as of December 31, 2021 were as follows:
(in thousands)CapitalOperating
2022$8,824 $12,398 
20238,672 12,002 
20248,743 11,699 
20258,926 11,420 
20269,229 11,297 
Thereafter85,985 125,774 
Total$130,379 $184,590 
Less: imputed interest(47,402)
Present value of minimum lease payments82,977 
Less: current portion(3,389)
Lease liabilities, net of current portion$79,588 
A summary of lease terms and discount rates for finance and operating leases as of September 30, 2022 is as follows:
 September 30, 2022
Weighted-average remaining lease term (years) 
Finance leases16.2
Operating leases15.1
  
Weighted-average discount rate (percentages) 
Finance leases5.2%
Operating leases4.1%
Supplemental cash flow information related to leases as of September 30, 2022 is as follows for the period presented:
(in thousands; unaudited)Nine Months Ended September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases$6,261 
Operating cash flows from operating leases11,611 
Financing cash flows from finance leases3,144 
Right-of-use assets obtained in exchange for lease obligations 1
Finance leases135,987 
Operating leases171,437 
_________________
1    Amounts include the transition adjustment for the adoption of ASU 2016-02, as amended.
Leases NOTE 8 — Leases
Adoption of ASC 842
The Company adopted ASC 842, as amended, using the modified retrospective transition method with an effective date of January 1, 2022. The modified retrospective approach permits a company to use its effective date as the date of initial application to apply the standard to its leases, and, therefore, not restate comparative prior period financial information. As such, results for reporting periods beginning on or after January 1, 2022 are presented under ASC 842. Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 840 (ASC 840). Further, disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2022. The adoption of the lease standard resulted in a cumulative adjustment to opening equity of $0.4 million, as provided in the table below.
Subsequent to the Company’s January 1, 2022 adoption of the lease standard, the Company continued to review relevant lease contract elements and improve business processes, which resulted in adjustments to the Company’s adoption entries and presentation. The impacts of the adjustments were recorded in the nine months ended September 30, 2022, and are presented in the table below and in the condensed consolidated financial statements.
Upon adoption, the Company recognized operating lease liabilities of $152.8 million based on the present value of the remaining lease payments for existing operating leases, and right-of-use assets of $150.7 million, net of reductions for the impacts of deferred rents. As part of the transition, the Company derecognized all landlord funded lease incentives and deemed landlord financing liabilities, including capital assets related to previous sale and leaseback transactions which were remeasured under ASC 842.
The standard provides several optional practical expedients in transition. The Company elected the package of practical expedients, which permits it to not reassess, under the new standard, the Company's prior conclusions about lease identification, lease classification and initial direct costs. As such, the Company applied the modified retrospective transition method as of the adoption date to those lease contracts for which it had taken possession of the property as of January 1, 2022.
The Company also elected the practical expedient pertaining to land easements and did not elect the practical expedient related to use-of-hindsight. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption and also the practical expedient to not separate lease and non-lease components for all its leases.
Upon transition, the Company recorded the following increases (decreases) to the respective line items on its condensed consolidated balance sheet:
(in thousands)
Adjustments as of January 1, 2022
(As Reported)
Subsequent Adjustments Cumulative Adjustments as of September 30, 2022
(As Corrected)
Property and equipment, net$(79,821)$(6,171)$(85,992)
Finance lease right-of-use assets111,826 3,745 115,571 
Operating lease right-of-use assets150,689 — 150,689 
Deferred rent(3,153)— (3,153)
Current portion of finance lease obligations607 — 607 
Current portion of operating lease obligations8,430 — 8,430 
Current portion of long-term debt(46)— (46)
Finance lease obligations, net of current portion32,534 — 32,534 
Operating lease obligations, net of
current portion		144,405 — 144,405 
Long-term debt, net of current portion(1,426)(1,506)(2,932)
Accumulated deficit386 (264)122 
Non-controlling interests957 (656)301 
Nature of Leases
The Company leases all of its domestic company-operated shops, warehouse facilities, headquarters buildings, and certain equipment under various non-cancelable lease agreements that expire on various dates through 2041. The Company evaluates contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. The Company evaluates whether it controls the use of the asset, which is determined by assessing whether it obtains substantially all economic benefits from the use of the asset, and whether the Company has the right to direct the use of the asset. If these criteria are met, a lease has been identified and has a term greater than one year, the Company accounts for the contract under the requirements of ASC 842.
Lease commencement is determined when the Company takes possession of a leased asset, at which time the Company also determines the lease classification as an operating or finance lease. The Company’s real estate leases consist of commercial ground leases (land only) and build-to-suit leases (land and building).
The real estate leases are a combination of both operating and finance leases, depending on evaluation of the lease terms. Generally, the Company’s real estate leases have an initial term of 15 years and typically include two to three renewal options of five-years each. These renewal options are included in the lease term when it is reasonably certain that the option will be exercised. For commercial ground leases, one five-year renewal is included in the Company’s initial lease term calculations. The Company’s real estate leases typically provide for fixed minimum rent payments. For operating leases, the Company recognizes lease expense on a straight-line basis over the lease term from the date the Company takes possession of the leased property. Lease expense incurred before a lease commences is included in the calculation of the right-of-use asset. Once a lease commences, the Company records lease expense in cost of sales on the Company’s condensed consolidated statements of operations. Variable lease costs generally include payments for additional rent such as real estate taxes, insurance, and common area maintenance, and are excluded from the measurement of the lease liability. Variable lease costs are included in cost of sales on the condensed consolidated statements of operations.
The Company calculates right-of-use assets and lease liabilities based on the present value of the fixed lease payments, including any estimated lease incentives, at lease commencement using its incremental borrowing rate, applied on a portfolio basis. As the rate implicit in the Company’s leases cannot be readily determined, the discount rate used to measure the lease liability is equal to the rate the Company would pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
The Company expends cash for leasehold improvements to build out and equip its leased premises. For certain leases, a portion of the leasehold improvements and building costs are reimbursed by landlords as landlord incentives pursuant to agreed-upon terms in the Company’s lease agreements. Landlord incentives, if obtained, are received in cash after the Company takes possession of the property, and as the Company meets required milestones during the construction of the property. The Company includes these amounts in the measurement of the initial right-of-use asset and lease liability.
A summary of finance and operating lease right-of-use assets and lease liabilities as of September 30, 2022 is as follows:
(in thousands)Balance Sheet ClassificationSeptember 30, 2022
Right-of-use assets
Finance leasesFinance lease right-of-use assets, net$214,903 
Operating leasesOperating lease right-of-use assets, net165,682 
Total right-of-use assets$380,585 
Lease liabilities
Finance leasesCurrent portion of finance lease obligations$7,004 
 Finance lease obligations, net of current portion209,257 
Operating leasesCurrent portion of operating lease obligations9,462 
 Operating lease obligations, net of current portion157,319 
Total lease liabilities $383,042 
The components of lease cost were as follows for the periods presented:
(in thousands)Statement of Operations ClassificationThree Months Ended September 30, 2022Nine Months Ended September 30, 2022
Finance lease cost
Amortization of right-of-use assetsCost of sales$3,121 $7,919 
Interest on lease liabilitiesInterest expense2,482 6,261 
Total finance lease cost5,603 14,180 
Operating lease costCost of sales4,228 12,109 
  
Variable lease costCost of sales566 1,625 
Total lease cost$10,397 $27,914 
Future minimum lease payments for finance and operating lease liabilities as of September 30, 2022 were as follows:
(in thousands)FinanceOperating
Remainder of 2022$4,882 $4,363 
202317,527 15,601 
202418,185 15,291 
202518,417 15,009 
202618,741 14,868 
Thereafter246,068 161,592 
Total$323,820 $226,724 
Less: imputed interest(107,559)(59,943)
Present value of minimum lease payments216,261 166,781 
Less: current portion(7,004)(9,462)
Lease liabilities, net of current portion$209,257 $157,319 
Future minimum lease payments under noncancellable operating leases and capital lease liabilities as of December 31, 2021 were as follows:
(in thousands)CapitalOperating
2022$8,824 $12,398 
20238,672 12,002 
20248,743 11,699 
20258,926 11,420 
20269,229 11,297 
Thereafter85,985 125,774 
Total$130,379 $184,590 
Less: imputed interest(47,402)
Present value of minimum lease payments82,977 
Less: current portion(3,389)
Lease liabilities, net of current portion$79,588 
A summary of lease terms and discount rates for finance and operating leases as of September 30, 2022 is as follows:
 September 30, 2022
Weighted-average remaining lease term (years) 
Finance leases16.2
Operating leases15.1
  
Weighted-average discount rate (percentages) 
Finance leases5.2%
Operating leases4.1%
Supplemental cash flow information related to leases as of September 30, 2022 is as follows for the period presented:
(in thousands; unaudited)Nine Months Ended September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases$6,261 
Operating cash flows from operating leases11,611 
Financing cash flows from finance leases3,144 
Right-of-use assets obtained in exchange for lease obligations 1
Finance leases135,987 
Operating leases171,437 
_________________
1    Amounts include the transition adjustment for the adoption of ASU 2016-02, as amended.