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Leases | 12 Months Ended
--- | ---
Dec. 31, 2023
Leases [Abstract] |
Leases | 6. Leases The Company has entered into various lease agreements for its Houses, hotels, restaurants, spas and other properties across North America, Europe, and Asia. Additionally, the Company entered into 34 equipment leases during 2023. The Company’s material leases have reasonably assured lease terms ranging from 1 year to 30 years for operating leases and 50 years for finance leases. Certain operating leases provide the Company with multiple renewal options that generally range from 5 years to 10 years, with rent payments on renewal based on a predetermined annual increase or market rates at the time of exercise of the renewal. The Company has 3 material finance leases with 25 year renewal options, with rent payments on renewal based on upward changes in inflation rates. As of December 31, 2023, the Company recognized right-of-use assets and lease liabilities for 151 operating leases and 3 finance leases. When recognizing right-of-use assets and lease liabilities, the Company includes certain renewal options where the Company is reasonably assured to exercise the renewal option. The Company reviews long-lived assets for impairment when changes in circumstances indicate that the asset's carrying value may not be recoverable. During fiscal 2023, the Company performed recoverability tests for certain asset groups using the undiscounted cash flows approach. Significant judgment is involved in determining the assumptions used in estimating future cash flows, including projected revenue growth, operating margins, economic conditions and changes in the operating environment. Changes in these assumptions could have a significant impact on the recoverability of the asset and may result in additional impairment charges. Based on the assessments, certain stand-alone sites failed the recoverability tests resulting in an aggregate impairment loss of $47 million comprised of $33 million in respect of Operating lease assets and $14 million of Property and equipment, net. The $47 million impairment is reported within loss on impairment of long-lived assets on the consolidated statement of operations for the year ended December 31, 2023. The Company believes that the expected future operating results will not be sufficient for the Company to fully recover its long-lived asset investment in certain asset groups. The maturity of the Company’s operating and finance lease liabilities as of December 31, 2023 is as follows:
(in thousands) Fiscal year ended |  | Operating Leases |  |  | Finance Leases |
Undiscounted lease payments |  |  |  |  |  |
2024 |  | $ | 152,366 |  |  | $ | 6,045 |
2025 |  |  | 155,559 |  |  |  | 6,084 |
2026 |  |  | 156,400 |  |  |  | 6,007 |
2027 |  |  | 147,933 |  |  |  | 5,997 |
2028 |  |  | 146,456 |  |  |  | 5,997 |
Thereafter |  |  | 1,673,916 |  |  |  | 221,891 |
Total undiscounted lease payments |  |  | 2,432,630 |  |  |  | 252,021 |
Present value adjustment |  |  | 1,078,571 |  |  |  | 173,540 |
Total net lease liabilities |  | $ | 1,354,059 |  |  | $ | 78,481 |
Certain lease agreements include variable lease payments that, in the future, will vary based on changes in the local inflation rates, market rate rents, or business revenues of the leased premises. Straight-line rent expense recognized as part of in-House operating expenses for operating leases was $144 million, $133 million, and $117 million for the fiscal years ended December 31, 2023, January 1, 2023, and January 2, 2022 respectively. Variable lease payments recognized as part of In-House operating expense for operating leases were $21 million, $20 million, and $6 million for the fiscal years ended December 31, 2023, January 1, 2023, and January 2, 2022, respectively, including non-lease components such as common area maintenance fees. For the fiscal years ended December 31, 2023, January 1, 2023, and January 2, 2022 the Company recognized amortization expense related to the right-of-use asset for finance leases of $2 million, $2 million, and $2 million respectively, and interest expense related to finance leases of $7 million, $5 million, and $5 million respectively. There were no material variable lease payments for finance leases for the fiscal years ended December 31, 2023, January 1, 2023, and January 2, 2022. New Houses typically have a maturation profile that commences sometime after the lease commencement date used in the determination of the lease accounting in accordance with Topic 842. The consolidated balance sheets set out the operating lease liabilities split between sites trading less than one year and sites trading more than one year. “Sites trading less than one year” and “sites trading more than one year” reference sites that have been open (as measured from the date the site first accepted a paying guest) for a period less than one year from the balance sheet date and those that have been open for a period longer than one year from the balance sheet date. The following information represents supplemental disclosure for the statement of cash flows related to operating and finance leases:
|  | For the Fiscal Year Ended |
(in thousands) |  | December 31, 2023 |  |  | January 1, 2023 |  |  | January 2, 2022 |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | (137,856 | ) |  | $ | (118,269 | ) |  | $ | (86,523 | )
Interest payments for finance leases |  |  | (6,444 | ) |  |  | (5,002 | ) |  |  | (5,037 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |
Principal payments for finance leases |  | $ | (407 | ) |  | $ | (528 | ) |  | $ | (281 | )
Supplemental disclosures of non-cash investing and financing activities: |  |  |  |  |  |  |  |  |
Operating lease assets obtained in exchange for new operating lease liabilities |  | $ | 124,779 |  |  | $ | 133,743 |  |  | $ | 170,105 |
Acquisitions of property and equipment under finance leases |  |  | 33 |  |  |  | 12,315 |  |  |  | - |
The following summarizes additional information related to operating and finance leases:
|  | As of
|  | December 31, 2023 |  | January 1, 2023
Weighted-average remaining lease term |  |  |  |
Finance leases |  | 42 years |  | 43 years
Operating leases |  | 16 years |  | 17 years
Weighted-average discount rate |  |  |  |
Finance leases |  | 7.29% |  | 7.29%
Operating leases |  | 7.89% |  | 7.93%
As of December 31, 2023, the Company has entered into 15 operating lease agreements that are signed but have not commenced. Of these, 10 relate to Houses, hotels, restaurants, and other properties that are in various stages of construction by the Landlord. The Company will determine the classification as of the lease commencement date, but currently expects these under construction leases to be operating leases. SHD is involved to varying degrees in the design of these leased properties under construction. For certain of these leases, the SHD team is acting as the construction manager on behalf of the landlord. The Company does not control the underlying assets under construction. Pending significant completion of all landlord improvements and final execution of the related lease, the Company expects these leases to commence in fiscal years ending 2024, 2025, 2026 and 2028. The Company estimates the total undiscounted lease payments for the leases commencing in fiscal years 2024, 2025, 2026 and 2028 will be $349 million, $224 million, $351 million and $390 million, respectively, with weighted-average expected lease terms of 21 years, 20 years, 22 years and 15 years for 2024, 2025 2026 and 2028, respectively. The following summarizes the Company’s estimated future undiscounted lease payments for current leases signed but not commenced, including properties where the SHD team is acting as the construction manager:
(in thousands) |  | Operating Leases Under |
Fiscal year ended |  | Construction |
Estimated total undiscounted lease payments |  |  |
2024 |  | $ | 3,439 |
2025 |  |  | 15,470 |
2026 |  |  | 23,817 |
2027 |  |  | 31,016 |
2028 |  |  | 48,361 |
Thereafter |  |  | 1,191,909 |
Total undiscounted lease payments expected for leases signed but not commenced |  | $ | 1,314,011 |
Financing Obligation In April 2017, the Company entered into an agreement to sell a property in downtown Los Angeles (“DTLA property”) for $30 million with $9 million contingently held back by the buyer. The Company simultaneously entered into an agreement to lease the land and building back from the buyer. As an incentive to enter the lease, the buyer committed to provide an additional $59 million of funding towards the development of the property, which included the contingent proceeds held back upon the sale. This lease agreement has an original lease term of 20 years, with two 10-year renewal options. The lease payments for the original lease term and both renewal options, if exercised, are $6.4 million per year, adjusted upward for local inflation rates that will not be less than 2% increase per year. The Company determined that the buyer/lessor did not obtain control of the property after the sale and will not obtain control throughout the construction period and subsequent leaseback period. Therefore, the transaction is accounted for as a financing obligation, and the Company will continue to recognize the building on its consolidated balance sheets. The Company also recognized a financing obligation for any funding received from the buyer/lessor along with accrued interest over the construction period. There was no current portion of the financing obligation as of December 31, 2023 and January 1, 2023. The non-current portion of the financing obligation was $77 million and $76 million as of December 31, 2023 and January 1, 2023, respectively. Costs incurred related to the development of the property were capitalized as incurred as a component of construction in progress. At the end of September 2019, the construction was complete and the property opened for business. Upon completion of construction, the balance of construction in progress was reclassified to depreciable asset classes within property and equipment, net. After the completion of construction, the Company expenses interest using the effective interest method in the period incurred. As of December 31, 2023 and January 1, 2023, the Company has capitalized $83 million and $85 million, respectively, pertaining to the DTLA property. The following information represents supplemental disclosure for the statement of cash flows related to the financing obligation for the DTLA property:
| For the Fiscal Year Ended |
(in thousands) | December 31, 2023 |  |  | January 1, 2023 |  |  | January 2, 2022 |
Cash flows from operating activities |  |  |  |  |  |  |  |  |  |  |
Interest payments for financing obligation | $ |  | (7,031 | ) |  | $ |  | (6,894 | ) |  | $ |  | (5,626 | )
Cash flows from investing activities |  |  |  |  |  |  |  |  |  |  |
Capitalized interest | $ |  | — |  |  | $ |  | — |  |  | $ |  | — |
Purchase of property and equipment |  |  | — |  |  |  |  | — |  |  |  |  | — |
Cash flows from financing activities |  |  |  |  |  |  |  |  |  |  |
Principal payments on financing obligation | $ |  | — |  |  | $ |  | (1,578 | ) |  | $ |  | (1,334 | )
Proceeds from financing obligation |  |  | — |  |  |  |  | — |  |  |  |  | — |
The following summarizes the Company's future undiscounted lease payments for the DTLA property:
(in thousands) | Financing Obligation |
Fiscal year ended |  |
Undiscounted lease payments |  |
2024 | $ | 7,172 |
2025 |  | 7,316 |
2026 |  | 7,462 |
2027 |  | 7,611 |
2028 |  | 7,763 |
Thereafter |  | 108,678 |
Total undiscounted lease payments |  | 146,002 |
Present value adjustment |  | 69,378 |
Total net financing obligation | $ | 76,624 |

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- Definition The entire disclosure for lessee entity's leasing arrangements including, but not limited to, all of the following: (a.) The basis on which contingent rental payments are determined, (b.) The existence and terms of renewal or purchase options and escalation clauses, (c.) Restrictions imposed by lease agreements, such as those concerning dividends, additional debt, and further leasing. + References Reference 1: http://fasb.org/us-gaap/role/ref/otherTransitionRef -Topic 840 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//840/tableOfContent + Details
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