Mr. Sean Morrison reports

DIVERSIFIED ROYALTY CORP. ANNOUNCES AGREEMENT TO ACQUIRE US-BASED STRATUS BUILDING SOLUTIONS TRADEMARKS, 2.1% DIVIDEND INCREASE AND $30 MILLION BOUGHT DEAL PUBLIC OFFERING OF COMMON SHARES

Diversified Royalty Corp. has entered into an agreement with SBS Franchising LLC (Stratus) of North Hollywood, California, to add its seventh royalty stream to Diversified Royalty's portfolio and Diversified Royalty's first royalty stream based primarily in the United States. Stratus is a franchisor that offers master franchises for commercial cleaning services and building maintenance services in the United States and Canada under the Stratus Building Solutions system and trademarks and also manages and operates certain master franchises through its affiliates in the United States.

Highlights:

• Acquisition of Stratus's worldwide trademark portfolio and certain other intellectual property rights for $59.4-million (U.S.), subject to adjustment if certain conditions are met;
• Estimated initial annual royalty revenue from Stratus of $6-million (U.S.), representing approximately 14 per cent of Diversified's pro forma adjusted revenue;
• Annual dividend on Diversified's common shares to be increased 2.1 per cent from 23.5 cents per share to 24.0 cents per share, effective Jan. 1, 2023, subject to closing of the acquisition;
• $30-million bought deal public offering of common shares to be led by Cormark Securities Inc. at a price of $2.80 per common share.

Acquisition overview

Diversified and its wholly owned subsidiary, Strat-B Royalties LP (Strat-B LP), entered into an acquisition agreement dated Nov. 14, 2022, with Stratus to acquire Stratus's worldwide trademark portfolio and certain other intellectual property rights utilized by Stratus in its business of offering, managing and operating master franchises for commercial cleaning services, and building maintenance care for a purchase price of $59.4-million (U.S.), subject to adjustment if certain conditions are met. The purchase price is expected to initially be financed with approximately $47-million drawn from Diversified's existing undrawn acquisition facility, a $15-million increase in the senior credit facilities of Diversified's subsidiary, ML Royalties LP (ML LP), and a new $15-million (U.S.) senior credit facility to be issued to Strat-B LP. The transaction is expected to close before the end of November, 2022, and is subject to customary closing conditions.

Immediately following the closing of the acquisition, Diversified will license the Stratus rights in the United States, Canada, Australia, New Zealand and the United Kingdom back to Stratus for 50 years, in exchange for an initial royalty payment of $6-million (U.S.) per annum. The initial royalty will be automatically increased by 5 per cent on each anniversary of the closing date in calendar years 2023, 2024, 2025 and 2026 and by 4 per cent on each anniversary of the closing date thereafter without any further consideration payable by Diversified or Strat-B LP. Stratus may also increase the annual royalty payable on April 1 of each year following the closing date, subject to Stratus satisfying certain royalty coverage tests. The amount of each royalty increase cannot be less than $1-million (U.S.) per annum and must, in respect of amounts over that threshold, be in increments of $100,000 (U.S.) per annum. In consideration for a royalty increase on an adjustment date, Strat-B LP will pay an amount to Stratus in cash, based on a formula that is intended to be accretive to Diversified shareholders, as additional consideration for the Stratus rights.

Payment of the royalty will be secured by a general security agreement granted by Stratus to Strat-B LP and by secured corporate guarantees to be granted to Strat-B LP by SBS Services Group LLC, an affiliate of Stratus that is the owner of various master franchises in the United States, and Stratus Building Solutions Canada Inc., a wholly owned subsidiary of Stratus, that grants master franchise agreements in Canada in connection with the Stratus business.

The acquisition is expected to increase Diversified's tax pools by approximately $80-million to approximately $315-million, which can be depreciated over time to reduce Diversified's taxes payable.

Stratus is a franchisor that offers master franchises for commercial cleaning services and building maintenance services in the United States and Canada under the Stratus Building Solutions system and trademarks and also manages and operates certain master franchises through its affiliates in the United States. Originally founded in 2006 by a predecessor entity, Stratus purchased the Stratus Building Solutions system and trademarks on Jan. 30, 2015. At present, based on the representations and warranties in the transaction agreements and Diversified's due diligence, Stratus has 58 master franchise businesses in the United States (13 of which are owned and operated by Status's affiliate, SBS Services Group) and 10 master franchise businesses in Canada. Those master franchisees operating the master franchise businesses have unit franchisees in the United States and unit franchisees in Canada. Stratus does not have any master franchisees or unit franchisees outside of the United States or Canada at present.

Based on Stratus's 2021 financial statements, Stratus, together with SBS Services Group and Stratus Building Solutions Canada, generated combined revenue of approximately $15-million (U.S.) for the year ended Dec. 31, 2021. The Stratus franchise network (including corporately owned master franchises) generated system sales of $147-million (U.S.) (approximately $197-million (Canadian) based upon a United States-dollar to Canadian-dollar foreign exchange rate of 1.3378 as published by the Bank of Canada on Nov. 10, 2022) for the 12 months ended Aug. 31, 2022.

Sean Morrison, president and chief executive officer, stated: "DIV has been building a diversified portfolio of royalties from high quality multilocation and franchisor businesses in Canada. DIV's objective has included bringing its unique royalty model to the U.S. market. In this regard, DIV has been promoting the royalty model at various International Franchise Association events in the U.S., reaching out to various franchise professionals and franchisor business owners directly. DIV's business development efforts have paid off with Stratus, its first U.S. royalty transaction. Stratus is a perfect fit for DIV's royalty model: a proven franchisor business with historically steady predictable cash flows, strong master franchisee and unit franchisee economics, and an opportunity to grow its master franchisee count from 68 up to 150 over the next five to 10 years. DIV's unique royalty model allows Stratus's owners to retain 100-per-cent equity ownership, monetize a significant portion of their current cash flows, and benefit from the future growth in profitability from continued strong same-store sales growth and from opening new master franchises. I strongly believe the Stratus royalty transaction will be transformative for DIV -- it will be a catalyst to open the very large U.S. franchisor market to DIV's unique royalty model."

Strat-B LP credit facility

Diversified has received a term sheet from a Canadian chartered bank for a senior credit facility in the amount of $15-million (U.S.) in respect of the transaction. The Strat-B LP credit facility is expected to have a term of 60 months and be non-amortizing. The Strat-B LP credit facility is expected to have a floating interest rate equal to SOFR (secured overnight financing rate) plus 2.0 per cent per annum; however, Diversified will have 90 days following closing to effectively fix the interest rate on 75 per cent of the amount borrowed under this facility through an interest rate swap. The Strat-B LP credit facility will be secured by the Stratus rights and the royalties payable by Stratus under the licence and royalty agreement and will have covenants usual for this type of a credit facility. The Strat-B LP credit facility will also be guaranteed by Diversified on a limited recourse basis through the pledge by Diversified of its interest in Strat-B LP.

Increase in ML LP credit facility

ML LP has received a term sheet from a Canadian chartered bank with respect to an amendment to increase ML LP's term loan in the amount of $15-million in respect of the transaction. The credit facility is expected to mature on May 1, 2025, and be non-amortizing. The $15-million incremental increase in the term loan will be subject to a floating interest rate expected to be equal to BA rate plus 2.00 per cent per annum; however, Diversified will be required to fix the interest rate on 75 per cent of the amount borrowed under this facility through an interest rate swap to be completed within 90 days of closing. The credit facility will continue to be secured by Mr. Lube trademarks and related intellectual property rights owned by ML LP and the royalties payable by Mr. Lube Canada LP to ML LP under the licence and royalty agreement between such parties. The credit facility is guaranteed by Diversified on a limited recourse basis through the pledge by Diversified of its interest in ML LP.

Dividend increase

Subject to completion of the transaction, Diversified's board of directors has approved an increase in Diversified's annual dividend from 23.5 cents per share to 24.0 cents per share, effective Jan. 1, 2023. Diversified estimates its pro forma payout ratio will be approximately 94 per cent.

$30-million bought deal public offering of common shares

In connection with the transaction, Diversified has entered into an agreement with a syndicate of investment dealers led by Cormark Securities pursuant to which the underwriters have agreed to purchase 10,715,000 common shares from the treasury of the corporation, at a price of $2.80 per common share for total gross proceeds of approximately $30-million.

In addition, the corporation has granted the underwriters an option to purchase up to an additional 1,607,250 common shares from the treasury of the corporation at the offering price for additional gross proceeds of up to approximately $4.5-million for market stabilization purposes and to cover overallotments, if any. The overallotment option is exercisable, in whole or in part, by the underwriters at any time up to 30 days following the closing of the offering.

The net proceeds of the offering will be used for repayment of outstanding amounts under Diversified's acquisition line following the completion of the acquisition.

The offering will be made by way of a prospectus supplement to the corporation's existing short-form base shelf prospectus dated May 11, 2021. The prospectus supplement will be filed with the securities commissions in all of the provinces of Canada, except Quebec. The offering documents will contain important detailed information about the securities being offered. Copies of the underwriting agreement and the offering documents will be available by visiting the corporation's profile on the SEDAR website maintained by the Canadian Securities Administrators.

Investor conference call

Management of Diversified will host a live conference call at 2 p.m. PT/5 p.m. ET on Monday, Nov. 14, 2022. To participate by telephone across Canada, call toll-free at 1-888-396-8049 or 1-416-764-8646. The management presentation for the conference call will be available on Diversified's website prior to the call. An archived telephone recording of the call will be available until Nov. 30, 2022, by calling 1-877-674-7070 or 1-416-764-8692 (playback passcode 317739, followed by the number sign).

About Diversified Royalty Corp.

Diversified is a multiroyalty corporation, engaged in the business of acquiring top-line royalties from well-managed multilocation businesses and franchisors in North America. Diversified's objective is to acquire predictable growing royalty streams from a diverse group of multilocation businesses and franchisors.

We seek Safe Harbor.