LEASES

9 Months Ended

Sep. 23, 2020

Nature of Leases

We lease all of our domestic Company-operated Shacks, our home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2036. We evaluate 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. We evaluate whether we control the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset, and whether we have the right to direct the use of the asset. If these criteria are met and we have identified a lease, we account for the contract under the requirements of Accounting Standards Codification Topic 842 ("ASC 842").

Upon the possession of a leased asset, we determine its classification as an operating or finance lease. Our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases. Generally, our real estate leases have initial terms ranging from 10 to 15 years and typically include two five-year renewal options. Renewal options are generally not recognized as part of the right-of-use assets and lease liabilities as it is not reasonably certain at commencement date that we would exercise the options to extend the lease. Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments based upon sales in excess of specified thresholds. When the achievement of such sales thresholds is deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period. For operating leases that include rent holidays and rent escalation clauses, we recognize lease expense on a straight-line basis over the lease term from the date we take possession of the leased property. Lease expense incurred before a Shack opens is recorded in Pre-opening costs on the Condensed Consolidated Statements of Income (Loss). Once a domestic Company-operated Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, in occupancy and related expenses on the Condensed Consolidated Statements of Income (Loss). Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses on the Condensed Consolidated Statements of Income (Loss).

As there were no explicit rates provided in our leases, we used our incremental borrowing rate in determining the present value of future lease payments. The discount rate used to measure the lease liability at the transition date was derived from the average of the yield curves obtained from using the notching method and the recovery rate method. The most significant assumption in calculating the incremental borrowing rate is our credit rating and is subject to judgment. We determined our credit rating based on a comparison of the financial information of SSE Holdings to other public companies and then used their respective credit ratings to develop our own.

We expend cash for leasehold improvements to build out and equip our leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements. If obtained, landlord incentives usually take the form of cash, full or partial credits against our future minimum

or contingent rents otherwise payable by us, or a combination thereof. In most cases, landlord incentives are received after we take possession of the property, as we meet required milestones during the construction of the property. We include these amounts in the measurement of the initial operating lease liability, which are also reflected as a reduction to the initial measurement of the right-of-use asset.

A summary of finance and operating lease right-of-use assets and liabilities as of September 23, 2020 and December 25, 2019 is as follows:


	Classification	September 23 2020		December 25 2019
Finance leases	Property and equipment, net	$	5,109	$	5,444
Operating leases	Operating lease assets	305,133		274,426
Total right-of-use assets		$	310,242	$	279,870




Finance leases:
	Other current liabilities	$	1,740	$	1,873
	Other long-term liabilities	3,493		3,643
Operating leases:
	Operating lease liabilities, current	34,859		30,002
	Long-term operating lease liabilities	336,149		304,914
Total lease liabilities		$	376,241	$	340,432

The components of lease expense for the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019 was as follows:


			Thirteen Weeks Ended				Thirty-Nine Weeks Ended
		Classification	September 23 2020		September 25 2019		September 23 2020		September 25 2019
Finance lease cost:
	Amortization of right-of-use assets	Depreciation expense	$	531	$	538	$	1,710	$	1,491
	Interest on lease liabilities	Interest expense	51		52		161		148
Operating lease cost		Occupancy and related expenses General and administrative expenses Pre-opening costs	11,506		10,564		33,726		29,329
Short-term lease cost		Occupancy and related expenses	138		279		331		313
Variable lease cost		Other operating expenses Occupancy and related expenses General and administrative expenses Pre-opening costs	3,267		4,338		9,413		11,636
Total lease cost			$	15,493	$	15,771	$	45,341	$	42,917

As of September 23, 2020, future minimum lease payments for finance and operating leases consisted of the following:


	Finance Leases		Operating Leases
2020	$	527	$	16,785
2021	1,890		46,943
2022	1,400		53,151
2023	896		53,705
2024	541		52,785
Thereafter	406		268,128
Total minimum payments	5,660		491,497
Less: imputed interest	427		120,489
Total lease liabilities	$	5,233	$	371,008

As of September 23, 2020 we had additional operating lease commitments of $45,605 for non-cancelable leases without a possession date, which will begin to commence in 2020. These lease commitments are consistent with the leases that we have executed thus far.

A summary of lease terms and discount rates for finance and operating leases as of September 23, 2020 and December 25, 2019 is as follows:


		September 23 2020		December 25 2019
Weighted-average remaining lease term (years):
	Finance leases	5.3		5.1
	Operating leases	9.8		10.1
Weighted-average discount rate:
	Finance leases	3.6	%	3.7	%
	Operating leases	3.8	%	5.4	%

Supplemental cash flow information related to leases for the thirty-nine weeks ended September 23, 2020 and September 25, 2019 is as follows:


		Thirty-Nine Weeks Ended
		September 23 2020	September 25 2019
Cash paid for amounts included in the measurement of lease liabilities:
	Operating cash flows from finance leases	161	$	148
	Operating cash flows from operating leases	29,449	27,238
	Financing cash flows from finance leases	1,670	1,433
Right-of-use assets obtained in exchange for lease obligations:
	Finance leases	1,411	1,927
	Operating leases	42,502	65,773

LEASES