Mr. Sean Morrison reports

DIVERSIFIED ROYALTY CORP. ANNOUNCES RECORD FOURTH QUARTER ADJUSTED REVENUE(1) AND RECORD YEAR END 2023 RESULTS

Diversified Royalty Corp. has released its financial results for the three months (Q4 2023) and year ended Dec. 31, 2023.

Highlights:

• The weighted average organic royalty growth (1) of Diversified Royalty's diversified royalty portfolio was 6.8 per cent in Q4 2023 and 8.4 per cent for the year ended Dec. 31, 2023, compared with 8.6 per cent in Q4 2022 and 11.6 per cent for the year ended Dec. 31, 2022;
• Revenue was $16.4-million in Q4 2023 and $56.5-million for the year ended Dec. 31, 2023, up 28.9 per cent and 25.0 per cent, respectively, compared with $12.7-million in Q4 2022 and $45.2-million for the year ended Dec. 31, 2022;
• Adjusted revenue (1) of $17.7-million in Q4 2023 and $61.6-million for the year ended Dec. 31, 2023, up 26.4 per cent and 22.7 per cent, respectively, compared with $14.0-million in Q4 2022 and $50.2-million for the year ended Dec. 31, 2022;
• Distributable cash (1) of $10.4-million in Q4 2023 and $38.1-million for the year ended Dec. 31, 2023, up 11.5 per cent and 18.0 per cent, respectively, compared with $9.3-million in Q4 2022 and $32.3-million for the year ended Dec. 31, 2022;
• Payout ratio (1) of 84.2 per cent in Q4 2023 on dividends of 6.09 cents per share and 90.2 per cent for the year ended Dec. 31, 2023, on dividends of 24.1 cents per share, compared with 82.2 per cent in Q4 2022 on dividends of 5.82 cents per share and 86.8 per cent for the year ended Dec. 31, 2022, on dividends of 22.33 cents per share;
• Effective May 1, 2023, five new locations were added to the Mr. Lube + Tires royalty pool;
• On Oct. 4, 2023, Diversified Royalty closed a trademark acquisition and royalty agreement with BarBurrito Restaurants Inc. in Canada, adding an eighth royalty stream to Diversified Royalty's portfolio;
• In addition, subsequent to the year ended Dec. 31, 2023, on Feb. 23, 2024, Diversified Royalty closed its bought deal public offering of 20,320,500 common shares for gross proceeds of $54.0-million, including 2,650,500 common shares issued pursuant to the full exercise of the overallotment option, at a price of $2.66 per common share. The net proceeds were primarily used for the full repayment of outstanding amounts under Diversified Royalty's acquisition credit facility, which funds were drawn by Diversified Royalty to partially finance the BarBurrito acquisition.

In Q4 2023, Diversified Royalty generated $16.4-million of revenue, compared with $12.7-million in Q4 2022. After taking into account the Diversified Royalty royalty entitlement (1) (defined below) related to Diversified Royalty's royalty arrangements with Nurse Next Door Professional Homecare Services Inc., Diversified Royalty's adjusted revenue was $17.7-million in Q4 2023, compared with $14.0-million in Q4 2022. Adjusted revenue increased primarily due to positive trends at Mr. Lube + Tires, Mr. Mikes and Oxford, as well as the annual contractual increases at Stratus, Nurse Next Door and Sutton, as discussed in further detail below. In addition, incremental revenue was generated from the addition of four net new locations to the Mr. Lube Canada LP (Mr. Lube + Tires) royalty pool on May 1, 2022, the addition of five new locations to the Mr. Lube + Tires royalty pool on May 1, 2023, the incremental royalty income generated from Stratus (defined below) beginning on Nov. 15, 2022, plus the incremental royalty income generated from BarBurrito (defined below) beginning on Oct. 4, 2023.

(1) Adjusted revenue, distributable cash and Diversified Royalty royalty entitlement are non-IFRS (international financial reporting standards) financial measures, payout ratio is a non-IFRS ratio, and weighted average organic royalty growth is a supplementary financial measure.

Royalty partner business updates

Mr. Lube + Tires: Mr. Lube + Tires generated SSSG (2) (same-store sales growth) of 14.0 per cent for the Mr. Lube + Tires stores in the royalty pool for Q4 2023 and 17.1 per cent for the year ended Dec. 31, 2023, compared with SSSG of 17.0 per cent and 17.9 per cent, for the same respective prior periods in 2022, representing record results for Mr. Lube + Tires. SSSG in the current periods are primarily due to the sustained growth across all of Mr. Lube + Tires' offerings, including oil change services, tire sales and services, and maintenance services offerings.

(2) SSSG is a supplementary financial measure (non-IFRS measure).

Stratus: Royalty income from SBS Franchising LLC (Stratus) was $2.1-million ($1.5-million (U.S.) translated at an average foreign exchange rate of $1.3610 to $1 (U.S.)) for Q4 2023 and $8.2-million ($6.1-million (U.S.) translated at an average foreign exchange rate of $1.3493 to $1 (U.S.)) for the year ended Dec. 31, 2023. The corporation 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 thereafter.

Nurse Next Door: The royalty entitlement to Diversified Royalty (the Diversified Royalty royalty entitlement (3)) from Nurse Next Door was $1.3-million in Q4 2023 and $5.1-million for the year ended Dec. 31, 2023. The Diversified Royalty royalty entitlement from Nurse Next Door grows at a fixed rate of 2.0 per cent per annum during the term of the licence, with the most recent increase effective Oct. 1, 2023.

(3) Diversified Royalty royalty entitlement is a non-IFRS measure.

Mr. Mikes: SSSG (4) for the Mr. Mikes Restaurants Corp. restaurants in the Mr. Mikes royalty pool was 7.3 per cent in Q4 2023 and 10.1 per cent for the year ended Dec. 31, 2023, compared with SSSG of 36.1 per cent in Q4 2022 and 31.2 per cent for the year ended Dec. 31, 2022. The performance of the Mr. Mikes restaurants in the Mr. Mikes royalty pool were significantly more negatively impacted by vaccine and mask mandates and other government restrictions related to the COVID-19 pandemic in 2021 than compared with 2022, resulting in significantly higher SSSG in the comparable prior periods.

Royalty income and management fees of $1.1-million were generated from Mr. Mikes in Q4 2023, which excludes approximately $50,000 from the partial payment of deferred contractual royalty fees and accrued management fees compared with $1.0-million in Q4 2022, excluding approximately $0.2-million of deferred fees collected. Royalty income and management fees of $4.4-million were generated for the year ended Dec. 31, 2023, excluding approximately $200,000 from the partial payment of deferred contractual royalty fees and accrued management fees compared with $3.8-million for the year ended Dec. 31, 2022, excluding approximately $1.3-million of deferred fees collected. All deferred amounts have been collected as of Dec. 31, 2023.

In Q4 2022, Diversified Royalty and certain of its subsidiaries amended their royalty agreements with Mr. Mikes, pursuant to which Mr. Mikes now pays a royalty based on the actual system sales of the Mr. Mikes restaurants in the Mr. Mikes royalty pool rather than a fixed royalty. Those amendments had retroactive effect to June 13, 2022.

(4) SSSG is a supplementary financial measure (non-IFRS measure).

Oxford: The Oxford Learning Centres Inc. locations in the Oxford royalty pool generated SSSG (5) (on a constant currency basis) of negative 0.2 per cent in Q4 2023 and 5.9 per cent for the year ended Dec. 31, 2023, compared with SSSG 16.1 per cent in Q4 2022 and 15.3 per cent for the year ended Dec. 31, 2022. In 2022, Oxford saw a transition back to in-person tutoring for many locations, a trend that continued through the remainder of 2022 with system sales returning to prepandemic levels in the fourth quarter of 2022 and continued to grow in the first two quarters of 2023 and were flat in Q3 and Q4 of 2023.

(5) SSSG is a supplementary financial measure (non-IFRS measure).

Air Miles: In Q4 2023, royalty income of $1.0-million was generated from the Air Miles licences compared with $1.5-million generated in Q4 2022, a decrease of 28.1 per cent from the comparable quarter. For the year ended Dec. 31, 2023, royalty income of $4.4-million was generated compared with $6.5-million generated in the comparable year, a decrease of 33.0 per cent. The results in 2023 continue to be impacted by the winddown of the Sobey's exit from the Air Miles reward program in the second quarter of 2023.

Sutton: For the year ended Dec. 31, 2023, royalty income of $4.2-million was generated 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, 2023.

BarBurrito: Royalty income from BarBurrito Restaurants Inc. was $2.0-million for Q4 2023 and for the year ended Dec. 31, 2023. The corporation granted BarBurrito the licence to use the BarBurrito rights in exchange for a fixed monthly payment equal to $8.3-million per annum, which grows at a fixed rate of 4 per cent per annum for the first seven years and, commencing on Jan. 1, 2031, will fluctuate based on the gross sales of the BarBurrito locations in the royalty pool.

Fourth quarter commentary and outlook

Sean Morrison, president and chief executive officer of Diversified Royalty, stated: "We are pleased to announce that Q4 2023 was another record quarter for DIV, our best-ever quarter in terms of adjusted revenues. The year ended Dec. 31, 2023, was also a record year for DIV. The fourth quarter of 2023 once again saw strong performances across most of our royalty partners. Mr. Lube + Tires, our largest royalty partner, continues to produce strong double-digit growth, generating SSSG (6) of 14.0 per cent, Mr. Mikes generated positive SSSG (6) results of 7.3 per cent, while Oxford was flat. Royalty partners Nurse Next Door, Sutton and Stratus made their fixed royalty payments. DIV continued to see a decrease in royalty income from Air Miles; however, the quarter-over-quarter trend indicates the business is stabilizing. DIV's Q4 2023 weighted average organic royalty growth (6) was 6.8 per cent, once again demonstrating the overall strength of DIV's diversified portfolio.

"DIV produced record results in fiscal 2023, and Mr. Lube + Tires, Oxford and Mr. Mikes are positioned for continued growth in fiscal 2024 with DIV's largest royalty partner, Mr. Lube + Tires, once again leading the way. The addition of BarBurrito as our eighth royalty partner was another highlight as DIV continues to build further diversification into its portfolio. In 2024, DIV continues to seek out potential transactions in the Canadian and U.S. markets with a focus on educating potential U.S. royalty partners about DIV's unique trademark and royalty structure."

(6) SSSG and weighted average organic royalty growth are supplementary financial measures (non-IFRS measures).

Distributable cash and dividends declared

In Q4 2023 and for the year ended Dec. 31, 2023, distributable cash (7) increased to $10.4-million (7.23 cents per share) and $38.1-million (26.71 cents per share), respectively, compared with $9.3-million (7.07 cents per share) and $32.3-million (25.71 cents per share), respectively, for the same respective periods in 2022. The increase in distributable cash (7) for the quarter was primarily due to higher adjusted revenue (7) (including payments from Mr. Mikes, representing partial payment of deferred contractual royalty fees and deferred contractual management fees described above) and lower professional fees, offset by higher interest and general and administrative expenses. The increase in distributable cash (7) for the year was primarily due to higher adjusted revenue, partially offset by higher interest expense, general and administrative expenses, and professional fees. The increase in distributable cash per share (7) for the quarter and year ended Dec. 31, 2023, were primarily due to the increases in distributable cash (7), partially offset by a higher weighted average number of common shares outstanding.

In Q4 2023 and for the year ended Dec. 31, 2023, the payout ratio (7) was 84.2 per cent and 90.2 per cent, respectively, compared with the payout ratios of 82.2 per cent and 86.8 per cent, for the same respective periods in 2022. The increase was primarily due to higher dividends declared per share, partially offset by higher distributable cash per share (8).

(7) Adjusted revenue and distributable cash are non-IFRS financial measures and distributable cash per share and payout ratio are non-IFRS ratios.

Net income (loss)

Net income for Q4 2023 was $9.1-million, compared with a net loss of $4.5-million for the three months ended Dec. 31, 2022. Net income for the year ended Dec. 31, 2023, was $31.7-million, compared with $15.6-million for the year ended Dec. 31, 2022. The net income in Q4 2023 and the increase in net income for the year ended Dec. 31, 2023, were primarily due to the higher adjusted revenues (8) and the non-cash impairment reversals of the Mr. Mikes intellectual property rights owned by Diversified Royalty, partially offset by the non-cash impairment losses related to the Air Miles and Sutton intellectual property rights owned by Diversified Royalty, fair value adjustments on financial instruments, higher income tax expenses, and a higher interest expenses.

(8) Adjusted revenue is a non-IFRS financial measure.

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. Diversified Royalty'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 + Tires, Air Miles, Sutton, Mr. Mikes, Nurse Next Door, Oxford Learning Centres, Stratus Building Solutions and BarBurrito trademarks. Mr. Lube + Tires 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 a home care provider with locations across Canada and the United States, as well as in Australia. Oxford Learning Centres is one of Canada's leading franchisee 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. BarBurrito is the largest quick-service Mexican restaurant food chain in Canada.

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.

Non-IFRS measures

Management believes that disclosing certain non-IFRS financial measures, non-IFRS ratios and supplementary financial measures provides readers with important information regarding the corporation's financial performance and its ability to pay dividends and the performance of its royalty partners. By considering these measures in combination with the most closely comparable IFRS measure, management believes that investors are provided with additional and more useful information about the corporation and its royalty partners than investors would have if they simply considered IFRS measures alone. The non-IFRS financial measures, non-IFRS ratios and supplementary financial measures do not have standardized meanings prescribed by IFRS and therefore are unlikely to be comparable with similar measures presented by other issuers. Investors are cautioned that non-IFRS measures should not be construed as a substitute or an alternative to net income or cash flows from operating activities as determined in accordance with IFRS.

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