Mr. Sean Morrison reports

DIVERSIFIED ROYALTY CORP. ANNOUNCES Q1 2023 RESULTS

Diversified Royalty Corp. has released its financial results for the three months ended March 31, 2023 (Q1 2023).

Q1 2023 highlights

• Revenue of $12.3-million, up 26.7 per cent compared with the three months ended March 31, 2022 (Q1 2022);
• Adjusted revenue of $13.6-million, up 23.9 per cent compared with Q1 2022;
• Distributable cash of $8.8-million, up 22.6 per cent compared with Q1 2022;
• Payout ratio of 96.1 per cent based on dividends of six cents per share for the quarter compared with 93.6 per cent in Q1 2022 based on dividends of 5.5 cents per share for the comparable quarter.

In Q1 2023, Diversified Royalty generated $12.2-million of revenue compared with $9.6-million in Q1 2022. After taking into account the DIV royalty entitlement (defined herein) related to Diversified Royalty's royalty arrangements with Nurse Next Door Professional Homecare Services Inc., Diversified Royalty's adjusted revenue was $13.6-million in Q1 2023, compared with $11.0-million in Q1 2022. Adjusted revenue increased primarily due to positive trends experienced by most of Diversified Royalty's royalty partners, as discussed in further detail herein. In addition, incremental revenue was generated from the addition of four net new stores to the Mr. Lube Canada LP royalty pool on May 1, 2022, plus incremental royalty income generated from Stratus (defined herein) beginning on Nov. 15, 2022.

Royalty partner business updates

Mr. Lube: Mr. Lube generated same-store sales growth (SSSG) of 17.6 per cent for the Mr. Lube stores in the royalty pool for Q1 2023, compared with SSSG of 16.3 per cent in Q1 2022. The increase was primarily due to continued growth in Mr. Lube's oil, maintenance and tire offerings, combined with higher customer traffic.

Stratus: Royalty income from SBS Franchising LLC was $2.0-million ($1.5-million (U.S.) translated at an average foreign exchange rate of $1.3520 to $1.00 (U.S.)) for Q1 2023. Diversified Royalty granted Stratus the licence to use the Stratus rights in exchange for an annual royalty payment of $6.0-million (U.S.) increasing each November at a rate of 5 per cent in 2023, 2024, 2025 and 2026, and 4 per cent per year thereafter.

Nurse Next Door: The royalty entitlement to Diversified Royalty from Nurse Next Door was $1.3-million in Q1 2023. The Diversified royalty entitlement from Nurse Next Door grows at a fixed rate of 2.0 per cent per annum during the term of the license, with the most recent increase effective Oct. 1, 2022.

Oxford: Oxford locations in the Oxford royalty pool generated SSSG (on a constant currency basis) of 15.8 per cent in Q1 2023, compared with SSSG of 14.2 per cent in Q1 2022. Building off a strong quarter in Q4 2022, Oxford's first quarter of 2023 saw continued strength with sales comparable with prepandemic levels and is representative of the increased demand for Oxford's tutoring services.

Mr. Mikes: SSSG for the Mr. Mikes restaurants in the royalty pool was 30.5 per cent in Q1 2023 compared with SSSG of 24.6 per cent in Q1 2022. Royalty income and management fees of $1.0-million were generated from Mr. Mikes in Q1 2023, which excludes approximately $50,000 from the partial payment of deferred contractual royalty fees and accrued management fees, compared with $700,000 in Q1 2022 (which excludes approximately $550,000 received from Mr. Mikes in Q1 2022 as a partial payment of deferred contractual royalty fees and accrued management fees). In Q1 2022, performance of the Mr. Mikes restaurants in the royalty pool was negatively impacted by vaccine and mask mandates and other government restrictions related to the COVID-19 pandemic which remained in place for all or a portion of such quarter in various provinces.

Air Miles: In Q1 2023, royalty income of $1.1-million was generated from the Air Miles licences compared with $1.5-million generated in Q1 2022. Diversified Royalty's wholly owned subsidiary, AM Royalties LP, collected $300,000 of royalty income for Q1 2023 from LoyaltyOne on April 14, 2023, representing the portion of the royalty income accrued by LoyaltyOne Co. in Q1 2023 after its initial filing under the Companies Creditors Arrangement Act, and Diversified Royalty currently expects, based on its discussions with LoyaltyOne, that the remaining $800,000 of royalty income owing for Q1 2023 (representing the portion of the royalty income accrued by LoyaltyOne in Q1 2023 up to the date of its initial filing under the CCAA) will be paid following the closing of the transactions under the purchase agreement between LoyaltyOne and the Bank of Montreal (BMO) pursuant to which BMO has agreed to purchase the Air Miles reward program, subject to court approval under the CCAA and other regulatory approvals and closing conditions.

Sutton: During Q1 2023, 100 per cent of the fixed royalty was collected from Sutton. The fixed royalty payable by Sutton increases at a rate of 2 per cent per year, with the most recent increase effective July 1, 2022.

First quarter commentary

Sean Morrison, president and chief executive officer of Diversified Royalty, stated: "We are very pleased with the strong start to 2023. This has been our best first quarter ever in terms of adjusted revenue and distributable cash. Mr. Lube, our largest royalty partner, continues to produce strong results, generating SSSG of 17.6 per cent for the period ended March 31, 2023, while Mr. Mikes and Oxford continue to show double-digit SSSG of 30.5 per cent and 15.8 per cent, respectively. DIV's Q1 2023 weighted average organic growth was 11.1 per cent (excluding the collection of $50,000 in Mr. Mikes deferred contractual royalty fees and accrued management fees) demonstrating the overall strength of Diversified Royalty's diversified portfolio.

Distributable cash and dividends declared

In Q1 2023, distributable cash increased to $8.8-million (6.24 cents per share) from $7.2-million (5.87 cents per share) in Q1 2022. The increase in distributable cash6 was primarily due to higher adjusted revenue (including a one-time payment of $50,000 from Mr. Mikes representing partial payment of deferred contractual royalty fees and deferred contractual management fees described herein), partially offset by higher interest expense and professional fees. The increase in distributable cash per share was primarily due to the increase in distributable cash, partially offset by a higher weighted average number of common shares outstanding.

In Q1 2023, the payout ratio was 96.1 per cent, an increase when compared with the payout ratio in Q1 2022 of 93.6 per cent. The increase was primarily due to higher dividends declared per share, partially offset by higher distributable cash per share.

Net income

Net income for Q1 2023 was $6.7-million, compared with net income of $6.2-million in Q1 2022. The increase in net income was primarily due to higher adjusted revenues partially offset by an increase in interest expense on credit facilities and income tax expense.

About Diversified Royalty Corp.

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

Diversified Royalty currently owns the Mr. Lube, Air Miles, Sutton, Mr. Mikes, Nurse Next Door, Oxford Learning Centres and Stratus Building Solutions trademarks. Mr. Lube is the leading quick-lube-service business in Canada, with locations across Canada. Air Miles is Canada's largest coalition loyalty program. Sutton is among the leading residential real estate brokerage franchisor businesses in Canada. Mr. Mikes operates casual steakhouse restaurants primarily in Western Canadian communities. Nurse Next Door is one of North America's fastest-growing home care providers with locations across Canada and the United States, as well as in Australia. Oxford Learning Centres is one of Canada's leading franchised supplemental education services. Stratus Building Solutions is a leading commercial cleaning service franchise company providing comprehensive environmentally friendly janitorial, building cleaning and office cleaning services primarily in the United States.

Diversified Royalty's objective is to increase cash flow per share by making accretive royalty purchases and through the growth of purchased royalties. Diversified Royalty intends to continue to pay a predictable and stable monthly dividend to shareholders and increase the dividend over time, in each case as cash flow per share allows.

We seek Safe Harbor.