Mister Car Wash Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

6 Months Ended

Jun. 30, 2021

10. Leases

The Company’s incremental borrowing rate for a lease is the rate of interest it expects to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. To determine the incremental borrowing rates used to discount the lease payments, the Company estimated its synthetic credit rating and utilized market data for similarly situated companies.

Balance sheet information related to leases consisted of the following for the periods presented:


		As of
	Classification	June 30, 2021		December 31, 2020
Assets
Operating	Operating right of use assets, net	$	696,134	$	681,538
Finance	Property and equipment, net		15,689		16,173
Total lease assets		$	711,823	$	697,711

Liabilities
Current
Operating	Current maturities of operating lease liability	$	35,545	$	33,485
Finance	Current maturities of finance lease liability		526		495
Long-term
Operating	Operating lease liability		698,751		685,479
Finance	Financing lease liability		15,647		15,917
Total lease liabilities		$	750,469	$	735,376

Components of total lease cost, net, consisted of the following for the periods presented:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020

Operating lease expense(1)	$	19,395	$	19,568	$	38,520	$	39,039
Finance lease expense
Amortization of lease assets		243		15		485		31
Interest on lease liabilities		292		23		586		46
Short-term lease expense		15		12		19		23
Variable lease expense(2)		2,564		1,866		6,488		4,975
Total	$	22,509	$	21,484	$	46,098	$	44,114

(1) Operating lease expense includes an immaterial amount of sublease income and is included in other store operating expenses and general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss.

(2) Variable lease costs consist of property taxes, property insurance, and common area or other maintenance costs for the Company’s leases of buildings.

The following includes supplemental information for the periods presented:


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Operating cash flows from operating leases	$	19,814		$	18,955		$	39,341		$	37,645
Operating cash flows from finance leases	$	292		$	22		$	586		$	46
Financing cash flows from finance leases	$	121		$	31		$	240		$	61

Operating lease liabilities arising from obtaining ROU assets	$	22,421		$	12,524		$	32,020		$	15,525
Finance lease liabilities arising from obtaining ROU assets	$	-		$	-		$	-		$	-

Weighted-average remaining operating lease term		14.74			15.19			14.74			15.19
Weighted-average remaining finance lease term		17.73			14.92			17.73			14.92

Weighted-average operating lease discount rate		6.40	%		6.25	%		6.40	%		6.25	%
Weighted-average finance lease discount rate		7.33	%		8.98	%		7.33	%		8.98	%

As of June 30, 2021, lease obligation maturities were as follows:


Fiscal Year Ending:	Operating Leases			Finance Leases
2021 (remaining six months)	$	40,600		$	833
2022		81,110			1,683
2023		80,674			1,716
2024		79,804			1,741
2025		79,525			1,766
Thereafter		791,988			23,883
Total future minimum obligations	$	1,153,701		$	31,622
Less: Present value discount		(419,405	)		(15,449	)
Present value of net future minimum lease obligations	$	734,296		$	16,173
Less: current portion		(35,545	)		(526	)
Long-term obligations	$	698,751		$	15,647

Forward-Starting Leases

As of June 30, 2021, the Company entered into 11 leases that had not yet commenced related to build-to-suit arrangements for car wash locations. These leases will commence in 2021 or 2022 with initial lease terms of five to 20 years.

As of December 31, 2020, the Company entered into 10 leases that had not yet commenced related to build-to-suit arrangements for car wash locations. These leases will commence in 2021 or 2022 with initial lease terms of five to 20 years.

Sale-Leaseback Transactions

During the three months ended June 30, 2021, the Company completed three sale-leaseback transactions related to its car wash locations for aggregate consideration of $42,600, resulting in a net gain of $7,117 which is included in (gain) loss on sale of assets in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. Contemporaneously with the closing of the sales, the Company entered into lease agreements for the properties for initial 20-year terms. For the sale-leaseback transactions consummated in the three months ended June 30, 2021, the cumulative initial annual rents for the properties was approximately $2,655, subject to annual escalations. These leases are accounted for as operating leases. During the three months ended June 30, 2020, the Company did not complete any sale-leaseback transactions.

During the six months ended June 30, 2021 and 2020, the Company completed four and one sale-leaseback transactions related to its car wash locations, respectively, with aggregate consideration of $46,267 and $3,805, respectively, resulting in a net gain of $6,846 and a net loss of $198, respectively, which are included in (gain) loss on sale of assets in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss. Contemporaneously with the closing of the sales, the Company entered into lease agreements for the properties for initial 20-year terms. For the sale-leaseback transactions consummated in the six months ended June 30, 2021, the cumulative initial annual rents for the properties was approximately $2,882, subject to annual escalations. These leases are accounted for as operating leases. For the sale-leaseback transactions consummated in the six months ended June 30, 2020, the cumulative initial annual rents for the properties was approximately $248, subject to annual escalations. These leases are accounted for as operating leases.