Diversified Royalty Corp. Annual Report 2017

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FY2017 Annual Report · Diversified Royalty Corp.

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Consolidated Financial Statements of

DIVERSIFIED ROYALTY CORP.

Years ended December 31, 2017 and 2016

KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of Diversified Royalty Corp.

We have audited the accompanying consolidated financial statements of Diversified Royalty
Corp., which comprise the consolidated statements of financial position as at December 31,
2017 and December 31, 2016, the consolidated statements of net income and comprehensive
income, changes in equity and cash flows for the years then ended, and notes, comprising a
summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting Standards, and for
such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to
fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based
on our audits. We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on our
judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, we
consider internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial
statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our audit opinion.

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides
services to KPMG LLP.

Diversified Royalty Corp.
Page 2

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects,
the consolidated financial position of Diversified Royalty Corp. as at December 31, 2017 and
December 31, 2016, and its consolidated financial performance and its consolidated cash
flows for the years then ended in accordance with International Financial Reporting
Standards.

Chartered Professional Accountants

March 29, 2018
Vancouver, Canada

DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)

As at December 31, 2017 and 2016

Assets

Current assets:

Cash and cash equivalents
Royalties and management fees receivable
Amounts receivable
Prepaid expenses and other

Deferred income tax asset
Interest rate swap assets
Intangible assets

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable and accrued liabilities
Restricted share unit obligation

Long-term bank loans, net of deferred financing charges
Convertible debentures
Deferred income tax liability
Interest rate swap liabilities

Shareholders' equity:
Share capital
Contributed surplus
Equity component of convertible debentures
Retained earnings (deficit)

Note

2017

2016

4
6

7
12
8

10
11
7

85,816
4,008
150
96
90,070

-
160
225,475

74,974
1,518
93
87
76,672

2,053
-
171,498

315,705

250,223

1,354
218
1,572

57,772
50,771
3,463
-

180,906
25,265
2,938
(6,982)
202,127

592
434
1,026

40,659
-
-
97

178,256
25,161
-
5,024
208,441

315,705

250,223

Nature of operations (note 1)
Contingencies (note 9)

The accompanying notes are an integral part of these consolidated financial statements.

DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Net Income and Comprehensive Income
(Expressed in thousands of Canadian dollars, except per share amounts)

Years ended December 31, 2017 and 2016

Royalty income
Management fees

Expenses
Salaries and benefits
Share-based compensation
General and administration
Professional fees
Litigation

Impairment of intangible asset

Income from operations

Interest expense on credit facilities
Other finance income, net
Fair value adjustment on interest rate swaps

Income before income taxes

Income tax expense

Net income and comprehensive income

Basic weighted average number of shares outstanding
Diluted weighted average number of shares outstanding

Basic income per share
Diluted income per share

Note

9
8

16
12

15
15

$
$

2017

20,613
306
20,919

1,616
975
568
209
331
-
3,699

17,220

(2,080)
516
257

15,913

4,353

11,560

2016

27,869
302
28,171

1,228
747
510
267
3,516
2,202
8,470

19,701

(2,159)
5
200

17,747

7,062

10,685

105,916,177
106,392,883

112,818,984
113,228,593

0.11
0.11

$
$

0.09
0.09

The accompanying notes are an integral part of these consolidated financial statements.

DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Changes in Equity
(Expressed in thousands of Canadian dollars, except for share amounts)

Years ended December 31, 2017 and 2016

Note

Common
shares

Share Contributed
surplus
capital

Equity
component of
convertible
debentures

Balance, January 1, 2017

105,481,136 $ 178,256

$ 25,161

Common shares issued
on DRIP
Share options exercised
Restricted share units settled
Share-based compensation
Issuance of Debentures,
net of expenses and taxes
Dividends declared
Comprehensive income

801,556
51,500
147,745
-

-
-
-

2,213
99
338
-

-
-
-

-
(22)
(293)
419

-
-
-

Retained
earnings
(deficit)

Total
equity

5,024

$ 208,441

-
-
-
-

2,213
77
45
419

-
-
-
-

2,938
-
-

-
(23,566)
11,560

2,938
(23,566)
11,560

Balance, December 31, 2017

106,481,937 $ 180,906

$ 25,265

2,938

(6,982)

$ 202,127

Note

Common
shares

Share capital

Contributed
surplus

Retained
earnings Total equity

Balance, January 1, 2016

113,065,496

$ 230,357

8,542

2,618

$ 241,517

Common shares issued on
roll-in of Sutton agents

Common shares issued on DRIP
Share options exercised
Restricted share units settled
Cancellation of shares
Share capital adjustment
Share-based compensation
Dividends declared
Reversal of dividends
payable to OJFG
Comprehensive income

8(a)
13(b)

455,392
553,274
375,600
23,561
(8,992,187)
-
-
-

8(a)

-
-

1,044
1,252
1,122
58
(22,031)
(33,546)
-
-

-
-

-
-
(358)
(58)
-
16,773
262
-

-
-

-
-
-
-
-
16,773
-
(25,122)

70
10,685

1,044
1,252
764
-
(22,031)
-
262
(25,122)

70
10,685

Balance, December 31, 2016

105,481,136

$ 178,256

25,161

5,024

$ 208,441

The accompanying notes are an integral part of these consolidated financial statements.

DIVERSIFIED ROYALTY CORP.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)

Years ended December 31, 2017 and 2016

Cash flows from (used in) operating activities:
Net income
Adjustments for:

Deferred income taxes

Impairment of intangible asset

Share-based compensation

Fair value adjustments on interest rate swaps
Interest expense on credit facilities

Other finance income, net

Foreign exchange gain (loss)

Interest paid
Interest received

Changes in non-cash operating items:

Royalties and management fees receivable
Amounts receivable
Prepaid expenses and other
Accounts payable and accrued liabilities
Provisions

Net cash provided by operating activities

Cash flows from (used in) financing activities:
Repayment of debt
Proceeds from issuance of debt
Debt financing and prepayment fees
Payment of dividends
Proceeds from exercise of share options
Net cash from (used in) financing activities

Cash flows from (used in) investing activities:
Purchase of intangible asset
Proceeds from sale of FW Rights
Net cash from (used in) financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents, beginning of year

2017

2016

11,560

10,685

4,353
-
975
(257)
2,080
(516)
(14)
(1,627)
828

(2,490)
(57)
(9)
(418)
-
14,408

-
74,900
(3,213)
(21,353)
77
50,411

(53,977)
-
(53,977)

10,842

74,974

7,062
2,202
747
(200)
2,159
(5)
237
(2,159)
101

762
(64)
(12)
(303)
(6,419)
14,793

(15,000)
-
(62)
(23,870)
764
(38,168)

-
89,460
89,460

66,085

8,889

Cash and cash equivalents, end of year

85,816

74,974

The accompanying notes are an integral part of these consolidated financial statements.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

Diversified Royalty Corp., (“DIV”), formerly BENEV Capital Inc. and prior to that Bennett Environmental Inc., is a company domiciled
in Canada and incorporated on July 29, 1992 under the Canada Business Corporation Act. The consolidated financial statements
of DIV as at and for the year ended December 31, 2017 are composed of DIV and its subsidiaries (together referred to as the
“Company”). The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) and traded under the symbol
“DIV”. The registered office of the Company is located at 902-510 Burrard Street, Vancouver, BC, V6C 3A8.

1. Nature of operations:

The current business of DIV is to acquire royalties from well-managed multi-location businesses and franchisors in North
America (“Royalty Partners”).

On June 19, 2015, the Company indirectly acquired, through SGRS Royalties Limited Partnership (“SGRS LP”) (an entity
controlled by the Company), all of the Canadian and U.S. trademarks and certain other intellectual property rights utilized by
Sutton Group Realty Services Ltd. (“Sutton”) in its residential real estate franchise business (the “SGRS Rights”). The Company
granted Sutton the licence to use the SGRS Rights for a term ending on December 31, 2114 in exchange for a royalty payment
initially equal to $56.25 per agent per month (the “Sutton Royalty Rate”) for the number of agents included in the royalty pool
(the “Sutton Royalty Pool”). Effective July 1, 2017, the Sutton Royalty Rate was increased to $58.523 per agent per month.

On August 19, 2015, the Company indirectly acquired through ML Royalties Limited Partnership (“ML LP”) (an entity controlled
by the Company), the trademarks and certain other intellectual property rights (the “ML Rights”) from Mr. Lube Canada Limited
Partnership (“Mr. Lube”). The Company granted Mr. Lube the licence to use the ML Rights for a term ending on August 19,
2114 in exchange for a royalty payment initially equal to 6.95% of system sales of Mr. Lube locations in the royalty pool (the
“Mr. Lube Royalty Pool”).

On August 25, 2017, the Company indirectly acquired through AM Royalties Limited Partnership (“AM LP”) (a wholly owned
subsidiary of the Company), the Canadian AIR MILES trademarks and certain Canadian intellectual property rights
(collectively, the “AIR MILES Rights”) from a subsidiary of Aimia Inc. (“Aimia”). In accordance with the terms of two license
agreements with LoyaltyOne Co. (collectively the “AIR MILES Licenses”) acquired by AM LP as part of acquisition of the AIR
MILES Rights, LoyaltyOne Co. has an exclusive right to use the AIR MILES Rights for the purposes of operating the AIR
MILES reward program in Canada (the “AIR MILES Program”) for an indefinite term in exchange for a royalty payment equal
to 1% of gross billings from the AIR MILES Program.

On September 26, 2014, the Company completed the acquisition (the “Franworks Acquisition”), through FW Royalties Limited
Partnership (“FW LP”) (an entity controlled by the Company), of all of the Canadian and U.S. trademarks and other intellectual
property rights related to the Original Joe’s, Elephant & Castle and State & Main restaurant businesses (the “FW Rights”) from
Original Joe’s Franchise Group Inc. (“OJFG”), a wholly owned subsidiary of Franworks Franchise Corp. (“Franworks”). The
Company granted Franworks the licence to use the FW Rights for a term ending on December 31, 2113 in exchange for a
royalty payment initially equal to 6.0% of system sales of the Franworks restaurants in the royalty pool (the “Franworks Royalty
Pool”). On November 27, 2016, the Company sold the FW Rights (note 8(a)).

Substantially all of the Company’s operating revenues are earned from the receipt of royalties and management fees from its
Royalty Partners. Accordingly, the revenues of the Company and its ability to pay dividends to shareholders are dependent on
the ongoing ability of its Royalty Partners to generate cash and pay royalties and management fees to the Company.

2. Basis of preparation:

(a) Statement of compliance:

These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”). The consolidated financial statements were authorized and approved for issue by the Company’s
Board of Directors on March 29, 2018.

(b) Basis of measurement:

These financial statements have been prepared on the historical cost basis except for the interest rate swaps and restricted
share unit obligation, which are measured at fair value.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

2. Basis of preparation:

These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency.

(d) Use of estimates and judgments:

The preparation of the consolidated financial statements requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates.

(i) Critical judgments:

 Consolidation:

In applying the criteria outlined in IFRS 10, Consolidated Financial Statements, judgment is required in
determining whether DIV controls FW LP, SGRS LP, and ML LP. Making this judgment involves taking into
consideration the concepts of power over these entities, exposure and rights to variable returns, and the ability
to use power to direct the relevant activities of these entities to generate economic returns. Using these criteria,
management has determined that DIV ultimately controls these entities through its majority ownership of the
respective general partners.

 Capitalization of acquisition costs:

At the time of acquisition, the Company considers whether or not it represents a business combination or an
asset acquisition. This requires the Company to make certain judgments as to whether or not the assets acquired
include the inputs, processes and outputs necessary to constitute a business. Under a business combination,
acquisition-related costs are recognized as an expense. When the acquisition does not represent a business
combination, it is accounted as an asset acquisition, where the costs are capitalized to the respective asset.

(ii) Key estimates and assumptions:



Intangible assets:

The Company carries the intangible assets at cost and are not amortized as they have an indefinite life.

The Company tests intangible assets for impairment annually or when there is any indication that an asset may
be impaired. This requires the Company to use a valuation technique to determine if impairment exists. This
valuation technique that is dependent on a number of different variables that requires management to exercise
judgment. As a result, the estimated cash flows the intangible assets are expected to generate could differ
materially from actual results.



Fair value of exchangeable partnership units in FW LP, SGRS LP, and ML LP (“Exchangeable Partnership
Units”):

The Company does not assign any value to the Exchangeable Partnership Units as they do not currently meet
the relevant criteria for exchange into common shares of DIV (note 8).

 Deferred taxes:

Deferred tax assets and liabilities are due to temporary differences between the carrying amount for accounting
purposes and the tax basis of certain assets and liabilities, as well as undeducted tax losses. In recognizing a
deferred tax asset, management makes estimates related to expectations of future taxable income, and the
expected timing of reversals of existing temporary differences.

 Convertible debentures:

The Company exercises judgment in determining the allocation of the equity and liability component of the
convertible debenture. The liability allocation is based on the estimated fair value of a similar liability that does
not have an equity conversion option and the residual amount is allocated to the equity component.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

3. Significant accounting policies:

These annual consolidated financial statements have been prepared using the accounting policies described below.

(a) Basis of consolidation:

These consolidated financial statements include the accounts of DIV, FW LP, SGRS LP, ML LP, AM LP and the respective
general partners. All significant intercompany transactions and balances have been eliminated on consolidation.

(b) Cash and cash equivalents:

Cash and cash equivalents consist of cash on hand, balances on deposit with Canadian chartered banks, and short-term
investments with terms of three months or less on the date of acquisition.

Royalty income and management fee revenue are recognized on an accrual basis as earned.

(d) Intangible assets:

The intangible assets are recorded at cost, which includes directly attributable acquisition costs, and are adjusted to record
the additions to the respective royalty pools. The intangible assets are not amortized as they have an indefinite life, and
are assessed for impairment as described in note 3(e).

(e) Impairment of intangible assets:

Intangible assets that are not amortized are subject to an annual impairment test or when events or changes in
circumstances indicate that the carrying value may not be recoverable. For the purpose of measuring recoverable
amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating
units or “CGUs”). The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use (being
the present value of the expected future cash flows of the CGU). In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the
time value of money and the risks specific to the asset. An impairment loss is recognized for the amount by which the
intangible asset’s carrying amount exceeds its recoverable amount.

A previously recognized impairment loss is assessed at each reporting date for any indicators that the loss has decreased
or no longer exists. An impairment loss is reversed only to the extent that the intangible asset's carrying value does not
exceed the carrying amount that would have existed had the original impairment loss had been recognized.

(f) Distributions to DIV shareholders:

Distributions to the Company’s shareholders are made monthly based upon available cash at the discretion of the Board
of Directors. Distributions are recorded when declared and are subject to the Company retaining such reasonable working
capital reserves as may be considered appropriate by the Company.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

3. Significant accounting policies (continued):

(g) Earnings per share:

The Company presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS is calculated
by dividing the net income attributable to common shareholders of the Company by the weighted average number of
common shares outstanding during the period. Diluted EPS is determined by adjusting the net income attributable to
common shareholders and the weighted average number of common shares outstanding, adjusted for dilutive potential
common shares, which comprise share options and restricted share units.

(h) Employee benefits:

(i) Share options:

The Company measures the compensation cost of share-based option awards to employees at the grant date using
the Black-Scholes option pricing model to determine the fair value of the options. The compensation cost of the
options is recognized as share-based compensation expense over the relevant vesting period of the share options.
Forfeitures are estimated and are adjusted if actual forfeitures differ from the original estimate unless forfeitures are
due to market-based vesting conditions. When the equity-settled share options are exercised, share capital is
increased by the sum of the consideration paid and the carrying value of the share options recorded to contributed
surplus.

(ii) Restricted share units:

Restricted share units (“RSUs”) are settled, in accordance with the respective RSU agreements, in common shares
or cash based on the number of vested restricted share units multiplied by the fair market value of the common shares
on the vesting date.

The Company measures the cost of equity-settled RSUs based on the fair value of the underlying shares at the grant
date, and is recorded as share-based compensation expense with a corresponding increase in equity over the vesting
period. The cost of cash-settled RSUs is based on the fair value of the underlying shares at the grant date, and is re-
measured at the end of each reporting period until the liability is settled. The fair value of the cash-settled RSUs is
recognized as compensation expense and a liability over the vesting period.

(i) Provisions:

A provision is recognized if, as a result of a past event, the Company has a legal or constructive present obligation that
can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
Provisions are reviewed at the end of each reporting period and adjusted or reversed to reflect management’s best
estimate of the expenditure required to settle the present obligation at the end of the reporting period. Provisions are
reduced by actual expenditures for which the provision was originally recognized. Where discounting has been used, the
carrying amount of the provision is accreted during the period to reflect the passage of time.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

3. Significant accounting policies (continued):

(j)

Income tax:

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss
except to the extent that it relates to a business combination, or items recognized directly in equity or in other
comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted
or substantively enacted at the reporting date, and any adjustment to tax payable in respect of the previous year.

Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities on
the consolidated statements of financial position and the amounts attributed to the assets and liabilities for tax purposes.
Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a
transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences
relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse
in the foreseeable future.

Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse,
based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and
liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income
taxes levied by same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current
tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent
that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are
reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will
be realized.

(k) Financial instruments:

Financial assets and liabilities are offset and the net amount is reported in the consolidated statements of financial position
when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis
or realize the asset and settle the liability simultaneously.

At initial recognition, all financial assets and liabilities are recorded at fair value, net of attributable transaction costs, except
for financial assets and liabilities classified as fair value through profit or loss. The Company classifies its financial
instruments in the following categories depending on the purposes for which the instruments were acquired:



Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. Cash and cash equivalents, royalties and management fees
receivable and amounts receivable are included in this category.

Loans and receivables are subsequently measured at amortized cost using the effective interest method.

 Financial liabilities at amortized cost: Financial liabilities at amortized cost include accounts payable and accrued
liabilities, and the amount drawn on the Company’s bank loans. These items are subsequently measured at amortized
cost using the effective interest rate method.

Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are
presented as non-current liabilities.



Financial assets and liabilities at fair value through profit or loss: A financial asset or liability is generally classified in
this category if it is acquired for the purposes of selling or repurchasing in the near term. Derivative financial
instruments are also included in this category unless they are designated as hedges. Interest rate swaps are included
in this category, and are measured at fair value with changes in fair value recognized in profit or loss.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

3. Significant accounting policies (continued):

(l)

Impairment of financial assets:

At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. The
criteria used to determine if objective evidence of an impairment loss exists include:

 Significant financial difficulty of the Company’s counterparty;

 Delinquencies in interest or principal payments; and



It becomes probable that the borrower will enter into bankruptcy or other financial reorganization.

If such evidence exists, the Company recognizes an impairment loss as follows:



Financial assets carried at amortized cost: the loss is the difference between the amortized costs of the loan or
receivable and the present value of the estimated future cash flows, discounted using the instrument’s original
effective interest rate.

Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of
the loss decreases and the decrease can be related objectively to an event occurring after the impairment was
recognized. The reversal is limited to an amount that does not state the asset at more than what its amortized cost
would have been in the absence of impairment.

(m) Convertible debentures:

The Company accounts for convertible debentures by allocating the proceeds of the debentures, net of financing costs,
between liability and equity based on estimated fair values of the debt and conversion option. The liability component is
valued first and the difference between the proceeds of the convertible debentures and the fair value of the liability
component is assigned to the equity component. Interest expense is recorded as a charge to earnings and is calculated
at an effective rate with the difference between the coupon rate and the effective rate being credited to the debt component
of the convertible debentures (accretion expense) such that, at maturity the debt component is equal to the face value of
the outstanding convertible debentures.

(n) Changes in accounting policies and disclosures:

Effective January 1, 2017, the Company adopted the amendments to IAS 7, Statement of Cash Flows. As a result of
applying these amendments, the Company presented new disclosures relating to the changes in financial liabilities arising
from financing activities (note 20).

Effective January 1, 2017, the Company also adopted the amendments to IAS 12, Income Taxes. The adoption of these
amendments did not have an impact on the Company’s consolidated financial statements.

(o) New standards applicable in future periods:

In May 2014, the International Accounting Standards Board (“IASB”) issued IFRS 15, Revenue from Contracts with
Customers, which will replace IAS 18, Revenue. The standard contains a single model that applies to contracts with
customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-
based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates
and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. The
new standard also contains disclosure requirements which are more detailed than the current standard. The mandatory
effective date of IFRS 15 is for annual periods beginning on or after January 1, 2018. The Company has performed a
preliminary review to assess the impact of this standard. The Company’s primary source of revenue is royalty income,
which is recognized on an accrual basis as earned. Although the Company will provide additional disclosures regarding
its performance obligations, the Company does not anticipate an impact on its revenue recognition policies or cash flows
as a result of the adoption of this standard.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

3. Significant accounting policies (continued):

(o) New standards applicable in future periods (continued):

IFRS 9, Financial Instruments, replaces the guidance in IAS 39, Financial Instruments: Recognition and Measurement on
the classification and measurement of financial assets and liabilities. Under IFRS 9, financial assets are classified and
measured based on the business model in which they are held and the characteristics of their cash flows. In addition,
under IFRS 9 for financial liabilities measured at fair value, changes in fair value attributable to changes in credit risk will
be recognized in other comprehensive income, with the remainder of the changes recognized in profit or loss. However,
if this requirement creates or enlarges an accounting mismatch in profit or loss, the entire change in fair value will be
recognized in profit or loss. The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1,
2018. The Company does not anticipate a significant impact on its financial statements as a result of the adoption of this
standard.

The IASB issued amendments to IFRS 2, Share-Based Payments that address three main areas: the effects of vesting
conditions on the measurement of a cash-settled share-based payment transaction, the classification of a share-based
payment transaction with net settlement features for withholding tax obligations, and accounting where a modification to
the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-
settled. The amendments are effective for annual periods beginning on or after January 1, 2018. Upon adoption on January
1, 2018, the Company will reclassify $0.2 million related to its restricted share unit obligation from liabilities to contributed
surplus. The Company will cease to apply mark-to-market accounting on share-based payment transactions with a net
settlement feature for withholding tax obligations.

In January 2016, the IASB issued IFRS 16, Leases. This standard introduces a single lessee accounting model and
requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying
asset is of a low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying
asset and a lease liability representing its obligation to make lease payments. The mandatory effective date of IFRS 16 is
for annual periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of IFRS 16 on
its consolidated financial statements.

4. Cash and cash equivalents:

Cash
Cash equivalents

5. Royalty pools:

(a) Mr. Lube:

2017

1,263
84,553

85,816

2016

812
74,162

74,974

Pursuant to the terms of the licence and royalty agreement dated August 19, 2015 (the “Mr. Lube Licence and Royalty
Agreement”), the royalty paid by Mr. Lube to ML LP is calculated by multiplying the system sales of locations within the
Mr. Lube Royalty Pool by an agreed royalty fee (the “Mr. Lube Royalty Rate”, initially set at 6.95%). In addition, ML LP is
entitled to receive a make-whole payment in the event that a Mr. Lube location in the ML Royalty Pool is permanently
closed during the royalty payment period. The make-whole payment is based on the lost system sales multiplied by the
Mr. Lube Royalty Rate. Mr. Lube will also, subject to meeting certain performance criteria, be provided opportunities to
increase the Mr. Lube Royalty Rate in four, 0.5% increments (note 8(c)).

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

5. Royalty pools (continued):

(a) Mr. Lube (continued):

In September 2017, Mr. Lube launched a new tire program. In connection with this incremental line of business, on October
20, 2017, ML LP amended its licence and royalty agreement (the “ML LRA Amendment”) with Mr. Lube in respect of this
new retail tire program. Mr. Lube is charging a lower royalty fee and waived certain other fees payable by Mr. Lube
franchisees on the sale of tires and rims to account for the lower margins on these hard goods. Pursuant to the ML LRA
Amendment, ML LP has agreed to charge an effective royalty rate payable on system sales derived from the sale of tires
and rims of 2.5% (compared to 6.95% on all other system sales) for the locations currently in the Mr. Lube royalty Pool.
The ML LRA Amendment is effective from September 18, 2017.

Royalty income from Mr. Lube for the years ended December 31, 2017 and 2016 was as follows:

Expressed in thousands of Canadian dollars, except
for number of locations

Locations in the Mr. Lube Royalty Pool at period end
Mr. Lube Royalty Pool system sales
Royalty income

2017

117
198,549
13,816

2016

117
189,838
13,237

During the year ended December 31, 2017, royalty income from Mr. Lube includes make-whole payments totaling $0.06
million (2016 - $0.04 million) on lost system sales of $0.8 million (2016 - $0.6 million).

(b) Sutton:

Pursuant to the terms of the licence and royalty agreement dated June 19, 2015 (the “Sutton Licence and Royalty
Agreement”), the royalty paid by Sutton to SGRS LP is calculated by multiplying a determined number of agents in the
Sutton Royalty Pool by the Sutton Royalty Rate. Sutton has the ability, subject to meeting certain performance criteria, to
increase the amount of the annual royalty payable to the Company by increasing the number of agents in the Sutton
Royalty Pool. The number of agents in the Sutton Royalty Pool may be increased annually, and will never be decreased.
The Sutton Royalty Rate will automatically increase by 2% each July 1st beginning in 2016. Sutton will also have the ability,
subject to meeting certain performance criteria, to increase the Sutton Royalty Rate in 10.0% increments four times during
the life of the royalty (note 8(b)).

Royalty income from Sutton for years ended December 31, 2017 and 2016 were calculated as follows:

Expressed in thousands of Canadian dollars, except
for number of agents and the Sutton Royalty Rate

Agents in the Sutton Royalty Pool at period end
Sutton Royalty Rate (per agent per month)
Royalty income

2017

5,400
58.523
3,754

2016

5,400
57.375
3,608

Effective July 1, 2017, the Sutton Royalty Rate increased from $57.375 per agent to $58.523 per agent, representing the
2.0% annual contractual increase in the Sutton Royalty Rate for 2017. Effective July 1, 2016, the Sutton Royalty Rate
increased from $56.25 per agent to $57.375 per agent, representing the 2.0% annual contractual increase in the Sutton
Royalty Rate for 2016.

On July 4, 2016, the Sutton Royalty Pool was adjusted to increase the number of agents in the Sutton Royalty Pool from
5,185 to 5,400 agents.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

5. Royalty pools (continued):

The royalty paid by LoyaltyOne Co. to AM LP is equal to 1% of the gross billings from the AIR MILES Program in
accordance with the terms of the AIR MILES Licenses. Royalty income related to the AIR MILES Program from August
25, 2017 (the date of the AIR MILES Program acquisition) to December 31, 2017 was as follows:

Expressed in thousands of Canadian dollars

Gross billings
Royalty income

(d) Franworks:

2017

304,306
3,043

2016

n / a
-

Pursuant to the terms of the licence and royalty agreement dated September 26, 2014 (the “Franworks Licence and
Royalty Agreement”), the royalty payment from Franworks to FW LP, is 6.0% of system sales (the “Franworks Royalty
Rate”) for such period reported by Franworks for the restaurants in the Franworks royalty pool (the “Franworks Royalty
Pool”) plus a make-whole payment, if required by a restaurant closure, based on 6.0% of lost system sales. System sales
for any period and for any Franworks restaurant located in Canada and the United States, means the gross sales by such
Franworks restaurant for such period.

On November 27, 2016, the Company completed the sale of the FW Rights to OJFG. Upon closing the sale of the FW
Rights, the previously existing royalty and other commercial arrangements between the Company and Franworks were
terminated. As a result, the year ended December 31, 2016 includes royalty income from Franworks from January 1, 2016
to November 27, 2016, the date the FW Rights were sold.

Royalty income from Franworks for the years ended December 31, 2017 and 2016 was as follows:

Expressed in thousands of Canadian dollars, except
for number of restaurants

Franworks Royalty Pool system sales
Royalty income

6. Royalties and management fees receivable:

Mr. Lube
Sutton
AIR MILES

7. Deferred income taxes:

Deferred income tax expense

2017

-
-

2016

181,117
11,024

2017

1,175
340
2,493

4,008

2017

4,353

2016

1,184
334
-

1,518

2016

7,062

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

7. Deferred income taxes (continued):

Income tax expense as reported differs from the amount that would be computed by applying the combined Federal and
Provincial statutory income tax rates to the income before income taxes. The reason for the difference is as follows:

Income before income taxes
Combined Canadian federal and provincial rates

Expected tax expense

Increased (decreased) by:
Permanent and other non-deductible differences

Impact of deferred tax rates applied versus current tax rates

Change in prior year estimates
Deferred taxes on FW Rights transaction
Non-deductible impairment loss

2017

15,913
26%

4,137

123
92
1
-
-

4,353

The tax effect of temporary differences that gives rise to the net deferred tax asset (liability) are as follows:

Deferred tax asset:
Non-capital losses
Financing and share issuance costs

Intangible assets
Investment tax credits

Other

Gross deferred tax asset

Deferred tax liability:
Intangible assets

Convertible debentures

2017

2,225
704
304
199
16

3,448

(5,775)
(1,136)

Net deferred tax asset (liability)

(3,463)

2016

17,747
26%

4,614

69
-
(478)
2,284
573

7,062

2016

3,479
1,266
312
199
138

5,394

(3,341)
-

2,053

As at December 31, 2017, the Company has non-capital loss carry forwards of $8.2 million (2016 - $13.4 million), which can
be carried forward and applied against future taxable income. Non-capital loss carry forwards expires as summarized in the
table below.

2033
2034

5,122
3,120

8,242

The deferred tax liability as at December 31, 2017 is largely associated with the temporary differences on the Company’s
intangible assets, which have an undepreciated capital cost allowance of approximately $160.4 million (2016 - $115.0 million).

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

Intangible assets:

FW Rights
(a)

SGRS Rights
(b)

ML Rights
(c)

AIR MILES
Program
(d)

Balance, January 1, 2016
Roll-in of Sutton agents
Impairment loss
Transferred to asset held for sale

Balance, December 31, 2016
Acquisition of AIR MILES Program

Balance, December 31, 2017

(a) FW Rights:

-
-

113,693
-
(2,202)
(111,491)

31,229
1,044
-
-

32,273

139,225
-
-
-

139,225
-

-
-
-
-

-
53,977

32,273

139,225

53,977

225,475

Total

284,147
1,044
(2,202)
(111,491)

171,498
53,977

FW LP licensed the FW Rights to OJFG for a period of 99 years in exchange for a royalty payment equal to the system
sales of the Franworks restaurants in the Franworks Royalty Pool multiplied by the Franworks Royalty Rate (note 5(d)).

In connection with the Franworks Acquisition, FW LP issued 100,000,000 Class B, Class C, and Class D LP units to OJFG.
These units would have become exchangeable into common shares of the Company through the exchange agreement
dated September 26, 2014 among OJFG, the Company and FW Royalties GP Inc. upon the satisfaction of certain
performance criteria. The Class B LP units would have become exchangeable on the contribution of additional Franworks’
restaurants into the Franworks Royalty Pool. The Class C and Class D LP units would have become exchangeable on the
increase in the Franworks Royalty Rate from 6.0% to 7.0% and from 7.0% to 8.0%, respectively, in accordance with the
partnership agreement dated September 26, 2014 among OJFG, the Company and FW Royalties GP Inc.

On April 1, 2015, the Franworks Royalty Pool was adjusted to include the royalties from four net new stores (“2015
Franworks Royalty Pool Amendment”). In return for adding these net sales to the Franworks Royalty Pool, Franworks
received the right to indirectly acquire common shares of the Company through the exchange of Class B LP units of FW
LP. The initial consideration for the estimated net additional royalty revenue was approximately $4.9 million representing
80% of the total estimated consideration of $6.2 million payable to Franworks for such additional royalty revenue. The
initial consideration was paid in the form of 1,835,728 DIV shares that were issued on April 1, 2015 to OJFG.

Based on the audited gross sales in 2015 of the net new stores added to the Franworks Royalty Pool on April 1, 2015, the
total consideration for the net additional royalty revenue was $6.7 million. After taking into account the 1,835,728 DIV
shares previously issued to OJFG on April 1, 2015, OJFG was entitled to receive 637,051 DIV shares on April 1, 2016.

On March 24, 2016, DIV, FW LP, Franworks Royalties GP Inc., and OJFG entered into an extension agreement pursuant
to which the parties agreed to: (i) extend the date for the payment of the 637,051 DIV shares to OJFG in respect of the
2015 Franworks Royalty Pool Amendment from April 1, 2016 to April 3, 2017, such shares to be entitled to receive a
dividend; and (ii) extend the deadline under the Franworks licence and royalty agreement from March 26, 2016 to April 3,
2017 for the expenditure by OJFG of $8.0 million to refurbish and renovate certain Elephant & Castle restaurants in the
Franworks Royalty Pool.

On November 27, 2016, the Company completed the sale of the FW Rights to OJFG for a total fair value of $112.0 million,
which consists of: (i) $90.0 million of cash; (ii) the cancellation of 8,992,187 DIV common shares held by OJFG; (iii) the
extinguishment of OJFG’s right to receive 637,051 DIV common shares related to the April 1, 2015 royalty pool adjustment;
and (iv) the extinguishment of OJFG’s right to receive accrued dividends on these shares to the date of closing.

In connection with the sale of the FW Rights, the Company recorded a non-cash impairment loss of $2.2 million during
the year ended December 31, 2016. The recoverable amount of $111.5 million for the FW Rights was determined based
on the fair value of the consideration received of $112.0 million, less transaction costs of $0.5 million.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

Intangible assets (continued):

(b) SGRS Rights:

SGRS LP licensed the SGRS Rights back to Sutton for 99 years in exchange for a royalty payment equal to the Sutton
Royalty Pool multiplied by the Sutton Royalty Rate (note 5(b)).

Upon closing the Sutton Acquisition, SGRS LP issued 100,000,000 Class A, Class B, Class C, Class D, and Class E LP
units to Sutton. These units will become exchangeable into common shares of the Company through the exchange
agreement dated June 19, 2015 among Sutton, SGRS Royalties GP Inc. and the Company upon the satisfaction of certain
performance criteria. The Class A LP Units become exchangeable into common shares of the Company on the contribution
of additional agents into the Sutton Royalty Pool. The Class B, Class C, Class D, and Class E LP units become
exchangeable into common shares of the Company on increases in the Sutton Royalty Rate of 10.0% increments four
times during the life of the royalty, in accordance with the partnership agreement dated June 19, 2015 among Sutton, the
Company, and SGRS Royalties GP Inc. (the “Sutton Exchange Agreement”).

In addition to the royalty, Sutton will pay the Company a management fee of approximately $0.1 million per year for
strategic and other services. The management fee will be increased by 10.0% every five years.

Annually on July 1, the Sutton Royalty Pool may be adjusted, subject to meeting certain performance criteria, to increase
the number of agents. In return for increasing the number of agents in the Sutton Royalty Pool, Sutton receives the right
to indirectly acquire common shares of the Company through the exchange of Class A LP Units of SGRS LP (the “SGRS
Additional Entitlement”). The SGRS Additional Entitlement is determined based on 92.5% of the estimated net tax-adjusted
royalty revenue added to the Sutton Royalty Pool, divided by the yield of the Company’s shares, divided by the weighted
average share price of the Company’s shares over the 20 days preceding May 31. The SGRS Additional Entitlement is
automatically exchanged by Sutton into common shares of DIV pursuant to the Sutton Exchange Agreement.

On July 4, 2016, the Sutton Royalty Pool was adjusted to increase the number of agents from 5,185 to 5,400 agents. The
consideration for the additional royalty income is approximately $1.0 million, and was calculated using a 7.5% discount of
the estimated royalty revenue added to the Sutton Royalty Pool. The consideration was paid in the form of DIV shares on
the basis of the 20-day volume weighted average closing price of DIV’s shares for the period ending May 24, 2016. Based
on a weighted average closing price of $2.2926 per share for such period, the consideration payable for the net additional
royalty income was paid to Sutton in the form of 455,392 DIV shares which were issued to Sutton on July 4, 2016.

ML LP licensed the ML Rights back to Mr. Lube for 99 years in exchange for a royalty payment equal to the system sales
of the Mr. Lube locations in the Mr. Lube Royalty Pool multiplied by the Mr. Lube Royalty Rate (note 5(a)).

Upon closing the Mr. Lube Acquisition, ML LP issued 100,000,000 Class B, Class C, Class D, Class E, and Class F units
to Mr. Lube. These units will become exchangeable into common shares of the Company through the exchange agreement
dated August 19, 2015 among Mr. Lube, ML Royalties GP Inc. and the Company (the “Mr. Lube Exchange Agreement”)
upon the satisfaction of certain performance criteria. The Class B LP units of ML LP become exchangeable into common
shares of the Company upon adding Mr. Lube locations to the ML Royalty Pool. The Class C, Class D, Class E, and Class
F LP units become exchangeable into common shares of the Company on increases in the ML Royalty Rate of 0.5%
increments four times during the life of the royalty, in accordance with the partnership agreement dated August 19, 2015
among Mr. Lube, the Company, and ML Royalties GP Inc.

In addition to the royalty, Mr. Lube will pay the Company a management fee of approximately $0.2 million per year for
strategic and other services. The management fee will be increased at a rate of 2.0% per annum over the term of the Mr.
Lube Licence and Royalty Agreement.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

Intangible assets (continued):

Annually on May 1, the Mr. Lube Royalty Pool may be adjusted, subject to meeting certain criteria, to include gross sales
from new Mr. Lube locations less gross sales from Mr. Lube locations that were permanently closed during the preceding
calendar year. In return for adding these net sales to the Mr. Lube Royalty Pool, Mr. Lube receives the right to indirectly
acquire common shares of the Company through the exchange of Class B LP Units of ML LP (the “ML Additional
Entitlement”). The ML Additional Entitlement is determined based on the estimated net tax-adjusted royalty revenue added
to the Mr. Lube Royalty Pool (adjusted by a 20% discount for locations that were open for business prior to June 30, 2019,
or a 7.5% discount for all other additions), divided by the yield of the Company’s shares, divided by the weighted average
share price of the Company’s shares over the 20 days preceding March 31. Mr. Lube receives 80% of the estimated ML
Additional Entitlement initially, with the balance received on May 1 of the subsequent year when the actual full year
performance of the new locations is known with certainty. The ML Additional Entitlement is automatically exchanged by
Mr. Lube into common shares of DIV pursuant to the Mr. Lube Exchange Agreement.

During the years ended December 31, 2017 and 2016, there were no additions to the Mr. Lube Royalty Pool.

(d) AIR MILES Rights:

On August 25, 2017, the Company acquired, through AM LP, the AIR MILES Rights from a subsidiary of Aimia for $53.8
million plus additional contingent consideration of up to $13.8 million. The Company funded the payment through cash on
hand of $36.4 million and the issuance of $17.4 million in debt. Additionally, $0.2 million in costs incurred for the acquisition
of the AIR MILES Program in Canada were capitalized as part of the purchase. The contingent consideration is subject to
certain milestones being met in 2018 or 2019. The milestones relate to the renewal of The Bank of Montreal’s AIR MILES
sponsorship contract, or the replacement of the AIR MILES sponsorship contract with another one of the four other major
Canadian chartered banks, as well as the royalty revenue post contract renewal or replacement. The contingent
consideration, if any, will be recorded as an expense when paid. In accordance with the terms of the AIR MILES Licenses,
AM LP will receive an aggregate royalty, payable quarterly, equal to 1% of gross billings from the AIR MILES Program in
Canada in perpetuity.

(e) Impairment assessment:

Annually, on December 31, the Company tests the carrying value of its intangible assets for impairment. Impairment exists
if the present value of the net cash flows is greater than the carrying value of the CGU. The estimates of future cash flows
require a number of key assumptions about future business performance. These assumptions and estimates are based
on the relevant business’ historical experience, economic trends, as well as past and ongoing communications with
relevant stakeholders of the Company.

The expected future cash flows are based on the most recent annual forecasts prepared by management and extrapolated
over five years, with a terminal capitalization rate applied on the expected cash flows thereafter to reflect the indefinite life
of the intangible assets. Subsequent to the most recent annual forecast, revenue is projected to grow at a rate of 2.0%
(2016 – 2.0%). These projected cash flows are discounted at pre-tax rates, based on the risks associated with the assets,
which range from 12.4% to 18.1% (2016 - 12.2% to 14.8%).

The Company also considers other reasonably possible scenarios where forecasted revenue is less than budget, along
with other reasonably possible higher discount rates to determine whether the intangible assets would be impaired under
those scenarios. As the carrying values of the SGRS Rights and the AIR MILES Rights at December 31, 2017 approximate
the estimated recoverable amounts, a subsequent change in any key assumption utilized in the estimate of future cash
flows may result in an impairment loss. As at December 31, 2017, the Company has determined that no additional
impairment exists.

An impairment loss was recorded in 2016 for the FW Rights intangible asset sold (note 8(a)).

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

9. Provisions and contingencies:

(a) John Bennett indemnity claim:

In 2009, John Bennett, CEO of the Company until early 2004, was charged with conspiracy to commit fraud and major
fraud against the United States between 2001 and mid-2004, and on March 16, 2016, the jury returned a guilty verdict on
both counts (conspiracy to commit fraud and major fraud against the United States). On August 9, 2016, the US courts
convicted and sentenced Mr. Bennett.

On December 7, 2016, the Company entered into an agreement with its insurance underwriter and Mr. Bennett to settle
Mr. Bennett’s indemnification claim against the Company and related matters. The Company agreed to make a payment
totaling $1.1 million in full satisfaction of all remaining and potential liabilities that it could have in respect of Mr. Bennett’s
legal expenses, reward for tenure contract, and any other claim he could assert. Mr. Bennett signed a full and final release
of all past, present and future claims against the Company and its past and current employees, directors and officers,
including not seeking recourse against the Company or any third party that could claim contribution and indemnity from
the Company directly or indirectly in respect of any matter.

(b) Insurance underwriter provision:

The Company had received reimbursements totaling $8.7 million from its insurance underwriter for Mr. Bennett’s legal
costs incurred in connection with his criminal defense, and as referenced in section (a) of this note. The Company paid
$6.4 million to settle the underwriter’s claim for repayment of amounts advanced to DIV in respect of Mr. Bennett’s past
indemnity claims. The insurance underwriter, DIV, and Mr. Bennett have signed full and final mutual releases.

Bennett had also served a claim against Second City Capital Partners I Limited Partnership (“Second City”), Samuel
Belzberg (“Belzberg”) and the Company in 2011. The claim alleged that in September 2009, the Company was in
possession of material undisclosed information and that, while in possession of such information, the Company and
Belzberg directed Second City to purchase the Company’s common shares from Mr. Bennett. As part of the settlement
agreement with Mr. Bennett described in note 9(a), Mr. Bennett has released all parties from this claim.

(d) Claim by U.S. contractor:

In 2008, Sevenson Environmental Services Inc. (“Sevenson”), a prime contractor on a U.S. Federal Government project
filed a complaint against the Company and many other persons in a U.S. court.

In 2009, the Court stayed all proceedings in this matter pending the conclusion of the Antitrust Division of the United States
Department of Justice investigation into the same matter. On November 18, 2014, the stay was lifted.

On February 11, 2015, Sevenson filed its third amended complaint against the Company. The complaint alleges that
employees of the Company conspired with an employee of the prime contractor relating to, among other things, the
awarding of contracts during the years 2002 through 2004. Of the 21 counts in the complaint, only six name the Company
as a defendant. The complaint seeks not less than approximately $1.1 million U.S. plus the value of additional gratuities
from the Company and punitive damages.

Counsel for the Company brought a motion to dismiss the third amended complaint for failure to plead enough facts to
state a claim for relief that is plausible on its face. In October 2015, the Company filed a counterclaim against Sevenson.
In December 2015, the Company and Sevenson agreed to non-binding mediation. This mediation was unsuccessful in
resolving this issue.

On March 16, 2018, Sevenson filed a brief in a U.S. court requesting an award of approximately $3.2 million U.S. plus
interest. On the same date, the Company filed its own brief requesting summary judgment to dismiss all claims.

Management intends to defend against this claim vigorously and has prepared a significant portion of its defense and
counterclaim against Sevenson. Management considers that it is not probable that a liability will result and no amount has
been recorded in the Company’s financial statements in respect of the complaint.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

10. Borrowings:

As at December 31, 2017, the Company had the following term loan facilities and operating lines of credit:

Term loan facilities

Principal

Interest rate

Maturity date

Unamortized
transaction
costs

BA + 2.00%
BA + 1.95%
BA + 2.25%

Jun 30, 2022
Jul 31, 2022
Sep 6, 2022

(70)
(271)
(187)

SGRS LP term loan
ML LP term loan
AM LP term loan

Operating
lines of credit

SGRS LP line of credit
ML LP line of credit
AM LP line of credit

$ 6,300
34,600
17,400

$ 58,300

Maximum
available

500
1,000
3,000

$ 4,500

Interest rate

Maturity date

BA + 2.00%
Prime + 0.25%
BA + 2.25%

Jun 30, 2022
Jul 31, 2022
Sep 6, 2022

As at December 31, 2016, the Company had the following term loan facilities and operating lines of credit:

Term loan facilities

Principal

Interest rate

Maturity date

SGRS LP term loan
ML LP term loan

Operating
lines of credit

SGRS LP line of credit
ML LP line of credit

$ 6,300
34,600

$ 40,900

Maximum
available

500
1,000

$ 1,500

(a) SGRS LP term loan and line of credit:

BA + 2.25%
BA + 2.50%

Jun 19, 2018
Aug 19, 2018

Interest rate

Maturity date

BA + 2.25%
Prime + 1.50%

Jun 19, 2018
Aug 19, 2018

Unamortized
transaction
costs

(63)
(178)

(241)

Amount
drawn

-
-

(528)

57,772

Amount
drawn

Remainder
Available
for use

-
-
-

Carrying
value

6,230
34,329
17,213

500
1,000
3,000

4,500

Carrying
value

6,237
34,422

40,659

Remainder
Available
for use

500
1,000

1,500

SGRS LP has a credit agreement that consists of a non-amortizing $6.3 million term loan and a $0.5 million demand
operating facility from a Canadian chartered bank. The SGRS LP term loan and line of credit are secured by the SGRS
Rights and the royalties payable by Sutton under the Sutton Licence and Royalty Agreement.

On June 20, 2017, SGRS LP amended the terms of its term loan and line of credit agreement to extend the maturity date
from June 19, 2018 to June 30, 2022. In addition, the interest rate for the SGRS LP term loan and operating line of credit
facilities was decreased to the BA rate plus 2.00%.

The SGRS LP term loan and line of credit are subject to certain financial covenants, including a covenant for SGRS LP to
maintain EBITDA for the trailing twelve-month period of at least $2.9 million. As at December 31, 2017 and 2016, SGRS
LP was in compliance with all financial covenants associated with this facility.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

10. Borrowings (continued):

(b) ML LP term loan and line of credit:

ML LP has a credit agreement that consists of a non-amortizing $34.6 million term loan and a $1.0 million demand
operating facility from a Canadian chartered bank. The ML LP term loan and line of credit are secured by the ML Rights
and the royalties payable by Mr. Lube under the Mr. Lube Licence and Royalty Agreement.

On July 31, 2017, ML LP amended the terms of its term loan and line of credit agreement to extend the maturity date from
August 19, 2018 to July 31, 2022. In addition, the interest rate for the ML LP term loan facility was decreased to the BA
rate plus 1.95%. The interest rate for the ML LP line of credit facility was decreased to the prime rate plus 0.75%.

The ML LP term loan and line of credit are subject to certain financial covenants, including a covenant for ML LP to
maintain a funded debt to EBITDA ratio of not more than 3.0:1.0. As at December 31, 2017 and 2016, ML LP was in
compliance with all financial covenants associated with this facility.

On September 6, 2017, in connection with the acquisition of the AIR MILES Rights, AM LP entered into a credit agreement
with a Canadian chartered bank for a senior credit facility that consists of a non-amortizing $17.4 million term loan facility
and $3.0 million line of credit. The AM LP term loan and line of credit are secured by the AIR MILES Rights and the
royalties payable by LoyaltyOne Co. under the AIR MILES Licenses.

The AM LP term loan and line of credit are subject to certain financial covenants, including a covenant for AM LP to
maintain a funded debt to EBITDA ratio of not more than 2.5:1.0. As at December 31, 2017, AM LP was in compliance
with all financial covenants.

11. Convertible debentures:

On November 7, 2017, the Company issued convertible unsecured subordinated debentures (“Debentures”) for an aggregate
principal amount of $57.5 million at a price of $1,000 per Debenture. The Debentures will mature on December 31, 2022 and
will bear interest at an annual rate of 5.25% payable semi-annually in arrears on the last day of December and June in each
year, commencing June 30, 2018. At the holder’s option, the Debentures may be converted into common shares of the
Company at any time prior to the earlier of: (i) the last business day immediately preceding December 31, 2022; or (ii) the date
specified by the Company for redemption of the Debentures. The conversion price will be $4.55 per common share (the
“Conversion Price), subject to adjustment in certain circumstances.

The Debentures are not redeemable prior to January 1, 2021, except upon the satisfaction of certain conditions after a change
of control has occurred. On or after January 1, 2021 and prior to December 31, 2021, the Debentures may be redeemed in
whole or in part from time to time at DIV’s option, provided that the volume weighted average trading price of the common
shares on the TSX during the 20 consecutive trading days ending on the fifth trading day preceding the date on which the
notice of the redemption is given is not less than 125% of the Conversion Price. On or after December 31, 2021 and prior to
the maturity date, DIV may, at its option, redeem the Debentures, in whole or in part, from time to time at par plus accrued and
unpaid interest. On redemption or at maturity, the Company will repay the indebtedness of the Debentures by paying an amount
equal to the principal amount of the outstanding Debentures, together with accrued and unpaid interest thereon.

The Company may, at its option, elect to satisfy its obligation to repay the principal amount of the convertible debentures,
which are to be redeemed or which have matured, by issuing shares to the holders of the convertible debentures. The number
of shares to be issued will be determined by dividing $1,000 of principal amount of the convertible debentures by 95% of the
then current market price on the day preceding the date fixed for redemption or the maturity date.

On November 7, 2017 and December 31, 2017, the face value of the Debentures outstanding was $57.5 million. On initial
recognition, the Company valued the liability component at $53.2 million and the equity component at $4.3 million. In addition,
the Company incurred transaction costs of $2.8 million, of which $2.6 million was allocated to the liability component and $0.2
million was allocated to the equity component. The net amount recognized as the equity component of the Debentures was
$2.9 million, after deferred taxes of $1.2 million and transaction costs of $0.2 million.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

11. Convertible debentures (continued):

The following table summarizes the liability value of the Debentures at December 31, 2017:

Balance, January 1, 2017
Issuance of Debentures
Transaction costs
Amortization of deferred financing charges
Accretion expense

Balance, December 31, 2017

12. Interest rate swaps:

2017

-
53,188
(2,587)
65
105

50,771

The Company has interest rate swap agreements that entitle the Company to receive interest at floating rates and effectively
pay interest at fixed rates for the SGRS LP and ML LP term loan facilities, as well as 50% of the AM LP term loan facility.

The interest rate swaps are re-measured at fair value at the end of each reporting period with fair values calculated as the
present value of contractual cash flows based on quoted forward curves and discount rates incorporating the applicable yield
curve. The following table summarizes the interest rate swap agreements the Company has entered into as of December 31,
2017:

Notional amount

6,300
34,600
34,600
8,700

Fixed
interest rate

3.16%
3.07%
4.17%
4.42%

Effective date

Maturity date

October 19, 2015
October 14, 2015
August 13, 2018
September 6, 2017

June 19, 2018
August 13, 2018
July 31, 2022
August 19, 2022

SGRS LP
ML LP
ML LP
AM LP

13. Share capital:

As at December 31, 2017, the authorized share capital of the Company consists of an unlimited number of common shares.

(a) Dividend reinvestment plan:

The Company has a dividend reinvestment plan (“DRIP”) that allows eligible holders of the Company’s common shares
to reinvest some or all cash dividends paid in respect of their common shares in additional common shares of the
Company. At the Company’s election, these additional common shares may be issued from treasury or purchased on the
open market. If the Company elects to issue common shares from treasury, the common shares will be purchased under
the DRIP at a 3% discount to the volume weighted average of the closing price for the common shares on the TSX for the
five trading days immediately preceding the relevant dividend payment date. The Company may, from time to time, change
or eliminate the discount applicable to common shares issued from treasury.

(b) Reduction in stated capital:

On November 10, 2016, the Company held a Special Meeting whereby shareholders approved a special resolution to
reduce the stated capital to $200.0 million. This approval resulted in a reduction of share capital of $33.5 million, and a
combined increase in contributed surplus and retained earnings of $33.5 million.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

14. Share-based compensation:

(a) Restricted share units:

The Company has a long-term incentive plan (the “Plan”) available to both employees and non-employees as a form of
retention and incentive compensation. The maximum number of common shares issued under the Plan is 10% of the
issued and outstanding common share of the Company at the time of the grant.

Under the Plan, the Company can issue RSUs whereby each RSU is equal in value to one common share of the Company
and is entitled to dividends that would arise thereon if it was an issued and outstanding common share. The notional
dividends are recorded as additional issuance of RSUs during the life of the RSU. Currently, all the outstanding RSUs will
be settled in common shares, unless the RSU holder elects to settle a portion of the RSUs in cash to pay the applicable
withholding taxes. As a result of this option, the RSUs are accounted for as a compound instrument that includes an
equity-settled portion and a cash-settled portion.

The number of RSUs outstanding is as follows:

Balance, beginning of year
Granted
Dividends earned
Settled

Balance, end of year

Unvested
Vested

2017
Weighted
average grant-
date fair value

$
$

2.42
3.36
2.80
2.43

3.08

3.29
2.19

Number of
RSUs

606,016
609,913
49,639
(372,894)

892,674

722,911
169,763

Number of
RSUs

433,218
168,992
48,856
(45,050)

606,016

606,016
-

2016
Weighted
average grant-
date fair value

$
$

2.50
2.31
2.34
2.65

2.42

2.42
-

In January 2016, the Company announced that the Board of Directors of the Company elected to receive all compensation
related to 2016 in the form of RSUs. In addition, the Company’s President and CEO elected to receive at least 45% of his
base salary related to 2016 in RSUs. The RSUs were issued quarterly pursuant to the Company’s long-term incentive
plan at the five-day weighted average trading price of DIV’s common shares as at the end of each quarter. In connection
with this election, and as compensation for the services provided during the three months ended December 31, 2016, the
Company granted a total of 11,863 RSUs to three directors and 18,725 RSUs to the Company’s President and CEO at a
weighted average grant date fair value of $2.50 per RSU on March 29, 2017. These RSUs fully vested on March 31, 2017,
and were settled on April 3, 2017.

On March 29, 2017, a total of 58,059 RSUs were granted to five directors at a grant date fair value of $2.58 per RSU,
which vest in their entirety on April 1, 2020. In addition, in 2017, a total of 21,266 RSUs were issued at a grant date fair
value of $2.77 per RSU to certain directors that elected to receive their compensation related to 2017 in the form of RSUs.
These RSUs fully vest on April 2, 2018.

On November 23, 2017, the Company granted 500,000 RSUs to the Company’s President and CEO at a grant date fair
value of $3.53 per RSU, which vest in their entirety on November 23, 2020.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

14. Share-based compensation (continued):

(b) Share options:

The following table summarizes the changes in the Company’s share options during the years ended December 31, 2017
and 2016:

Balance, beginning of year
Granted
Exercised
Expired

Number of
options

232,900
2,300,000
(51,500)
-

Balance, end of year

2,481,400

2017
Weighted
average
exercise price

1.66
3.26
1.50
-

3.15

Number of
options

685,500
-
(375,600)
(77,000)

232,900

2016
Weighted
average
exercise price

1.92
-
2.12
2.12

1.66

The total fair value of the share options granted of $0.9 million during the year ended December 31, 2017 was calculated
as of the grant date using the Black-Scholes option pricing model with the following assumptions and inputs:

Expected life
Expected volatility
Expected dividend yield
Risk-free interest rate
Weighted average share price

2017

5 years
29.3%
6.8%
1.8%
$ 3.26

The following table summarizes information relating to outstanding and exercisable options as at December 31, 2017:

Exercise
prices

$ 1.50 - $ 1.79
$ 3.22 - $ 3.53

Options outstanding
Weighted
average
remaining
life (years)

Weighted
average
exercise price
per share

Options exercisable

Number
exercisable

Weighted
average
exercise price
per share

0.59
4.80

4.49

1.71
3.26

3.15

181,400
-

181,400

1.71
-

1.71

Number
of options

181,400
2,300,000

2,481,400

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

15. Income per share:

Income for the year

Weighted average number of shares outstanding – basic
Dilutive adjustment for share options
Dilutive adjustment for RSUs
Weighted average number of shares outstanding – diluted

Net income per common share:
Basic
Diluted

16. Other finance income (costs), net:

Finance income
Foreign exchange gain (loss)
Amortization of deferred financing charges
Accretion expense

17. Financial instruments:

2017

2016

11,560

10,685

105,916,177
93,245
383,461
106,392,883

112,818,984
103,450
306,159
113,228,593

$
$

0.11
0.11

$
$

0.09
0.09

2017

828
(14)
(193)
(105)

516

2016

101
237
(271)
-

The Company must classify fair value measurements according to a hierarchy that reflects the significance of the inputs used
in performing such measurements. The Company’s fair value hierarchy comprises the following levels:

 Level 1 – quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active
markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an
ongoing basis.

 Level 2 – pricing inputs are other than quoted in active markets included in Level 1. Prices in Level 2 are either directly or

indirectly observable as of the reporting date.

 Level 3 – valuations in this level are those with inputs for the asset or liability that are not based on observable data.

The carrying value of current financial assets and liabilities approximate their fair value due to their short-term nature. The
carrying value of the long-term bank loans approximates their fair value as these facilities bear interest at floating market
interest rates. The fair value of the restricted share unit obligation is measured using Level 1 inputs. The fair value of the
convertible debentures of $57.9 million is measured using Level 1 inputs. The fair value of the interest rate swap assets
(liabilities) are measured using Level 2 inputs.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

17. Financial instruments (continued):

The following table presents the carrying amounts of each category of financial assets and liabilities:

Assets carried at amortized cost:
Cash and cash equivalents
Royalties and management fees receivable
Amounts receivable

Assets carried at fair value:

Interest rate swap assets

Liabilities carried at amortized cost:

Accounts payable and accrued liabilities
Long-term bank loans
Convertible debentures

Liabilities carried at fair value:

Restricted share unit obligation
Interest rate swap liabilities

2017

2016

$ 85,816
4,008
150

$ 89,974

160

1,354
57,772
50,771

74,974
1,518
93

76,585

592
40,659
-

$ 109,897

41,251

218
-

218

434
97

531

18. Financial risk management:

The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk, liquidity risk,
currency risk and interest rate risk. This note presents information about the Company’s exposure to each of the above risks,
the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of
capital. Further quantitative disclosures are included throughout these consolidated financial statements.

The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set
appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are
reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training
and management standards and procedures, aims to develop a disciplined and constructive control environment in which all
employees understand their roles and obligations.

The Board of Directors has responsibility for the oversight of the Company’s risk management framework. The Board of
Directors has mandated the Audit Committee to review how management monitors compliance of the Company’s risk
management policies and procedures and review the adequacy of the risk management policies and procedures.

(a) Credit risk:

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet
its contractual obligations. Credit risk is associated with the Company’s cash and cash equivalents, royalties and
management fees receivable, and amounts receivable.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

18. Financial risk management (continued):

(a) Credit risk (continued):

Credit risk on the Company’s cash and cash equivalents are mitigated by holding these amounts with a Canadian
chartered bank of high creditworthiness. Credit risk on the royalties and management fees receivable is monitored through
regular review of the operating and financing activities of the Company’s Royalty Partners. The carrying amount of financial
assets represents the maximum credit exposure. The maximum exposure to credit risk at December 31, 2017 and 2016
were as follows:

Cash and cash equivalents
Royalties and management fees receivable
Amounts receivable

2017

85,816
4,008
150

89,974

2016

74,974
1,518
93

76,585

The aging of royalties and management fees receivable, as well as amounts receivable at December 31, 2017 and 2016
were as follows:

Current
Over 30 days

(b) Liquidity risk:

2017

4,118
40

4,158

2016

1,611
-

1,611

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial
liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity
risk is to monitor consolidated cash flow to ensure that there will always be sufficient liquidity to meet liabilities when due.

As at December 31, 2017, the Company had a cash and cash equivalents balance of $85.8 million (2016 - $75.0 million)
and positive working capital of $88.5 million (2016 - $75.6 million). Management expects to refinance the non-amortizing
loans as they become due, and has sufficient cash resources to settle other contractual liabilities as they become payable.

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the
impact of netting agreements.

Carrying Contractual
cash flow
amount

2018

2019

2020

2021

Thereafter

Accounts payable and
accrued liabilities
Long-term bank loans(1)
Convertible debentures

$ 1,354
57,772
50,771

$
68,946
72,594

1,354 $ 1,354 $

2,107
3,019

-
2,354
3,019

-
59,777
60,519

Total contractual obligations
(1)

Includes the impact of interest rate swap agreements.

$109,897 $ 142,894 $ 6,480 $ 5,373

$ 5,373

$ 120,296

It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly
different amounts.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

18. Financial risk management (continued):

Currency risk is the risk that the fair value or future cash flows will fluctuate due to changes in foreign exchange rates.
During the year ended December 31, 2016, the Company was exposed to currency risk as a result of: (i) the translation
of Franworks’ U.S. restaurant dollar sales into Canadian dollars for the purposes of calculating the monthly royalty; (ii)
legal costs denominated in U.S. dollars related to the John Bennett indemnity claim (note 9(a)); and (iii) the provision for
legal costs the Company recovered from the insurance underwriter (note 9(b)).

As the Company sold the FW Rights on November 27, 2016 (note 8(a)), the Company is no longer exposed to currency
risk related to the translation of the Franworks’ U.S. restaurant dollar sales into Canadian dollars. In addition, on December
7, 2016, the Company settled the John Bennett indemnity claim and agreed to repay its insurance underwriter for certain
legal costs reimbursed to Mr. Bennett. As a result, the Company is no longer exposed to currency risk arising from these
matters.

The Company’s exposure to foreign currency risk at the reporting date is described below:

Expressed in thousands of U.S. dollars

Cash and cash equivalents

Net exposure in thousands of U.S. dollars

2017

293

2016

188

A 10% strengthening (weakening) of the Canadian dollar against the U.S. dollar would have increased (decreased) equity
and comprehensive income and loss by a nominal amount as at December 31, 2017 and 2016.

(d) Interest rate risk:

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in market interest rates. The Company’s exposure to interest rate risk mainly arises from the long-term bank loans, which
are subject to floating interest rates. As at December 31, 2017, interest rate risk was mitigated by interest rate swap
arrangements on $49.6 million of $58.3 million of the Company’s term loan facilities. As at December 31, 2016, interest
rate risk is mitigated by interest rate swap arrangements that fix the interest rates on all of the Company’s floating rate
term loan facilities.

Based on the balance outstanding on December 31, 2017, a one percentage point increase (decrease) in the interest rate
would increase (decrease) interest expense by a nominal amount. Based on the balance outstanding on December 31,
2016, a one percent point increase (decrease) in the interest rate would not have impacted interest expense, net of interest
income and net of the change in fair value of the interest rate swap.

(e) Capital management:

The Company’s objective is to maintain a strong capital base to maintain investor, creditor and market confidence and to
develop the business.

Management defines capital as the Company’s total shareholders’ equity and long-term bank loans. The Board of
Directors does not establish quantitative return on capital criteria for management. The Board of Directors reviews the
capital structure on a quarterly basis.

In order to maintain or adjust the capital structure, the Company may issue new shares, warrants, or debt, draw on its
operating line of credit, purchase shares for cancellation pursuant to normal course issuer bids, or reduce debt.

DIVERSIFIED ROYALTY CORP.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)

For the years ended December 31, 2017 and 2016

19. Related party transactions:

In addition to information disclosed elsewhere in these consolidated financial statements, the Company had the following
related party transactions during the years ended December 31, 2017 and 2016:

Key management personnel of the Company includes Members of the Board of Directors, the President and CEO, and CFO.
The table below provides a breakdown of the compensation of key management personnel included in net income:

Short-term benefits
Share-based compensation

2017

1,473
975

2,448

2016

961
747

1,708

During the year ended December 31, 2017, the Company paid fees of $0.6 million (2016 – $0.4 million) to a legal firm where
a current director of the Company is a partner.

The Company’s President and CEO and one of the Company’s directors are co-founders and managing partners of Maxam
Capital Corp (“Maxam”). The Company entered into a services agreement with Maxam whereby Maxam provides rent and
administrative services to the Company. During the year ended December 31, 2017, the Company paid Maxam approximately
$0.1 million (2016 - $0.1 million).

The above transactions are in the normal course of operations and are measured at the exchange amount, which is the amount
of consideration established and agreed to by the related parties.

20. Supplemental cash flow information:

The following table reconciles the movements in liabilities to cash flows arising from financing activities:

Balance, December 31, 2016

40,659

Long-term debt
(note 10)

Debentures

(note 11)

Total

Changes from financing cash flows:
Proceeds from issuance of debt
Debt financing and prepayment fees

Liability-related other changes:
Equity component of debentures
Amortization of deferred financing charges
Accretion expense

17,400
(415)

-
128
-

57,500
(2,798)

(4,101)
65
105

74,900
(3,213)

(4,101)
193
105

Balance, December 31, 2017

57,772

50,771

108,543