Diversified Royalty Corp. Annual Report 2022

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FY2022 Annual Report · Diversified Royalty Corp.

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Consolidated Financial Statements of

DIVERSIFIED ROYALTY CORP.

Years ended December 31, 2022 and 2021

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

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of Diversified Royalty Corp.,

Opinion

We have audited the consolidated financial statements of Diversified Royalty Corp. (“the
Entity”), which comprise:

•

the consolidated statements of financial position as at December 31, 2022 and
December 31, 2021;

the consolidated statements of net income (loss) and other comprehensive income
(loss) for the years then ended;

the consolidated statements of changes in equity for the years then ended;

the consolidated statements of cash flows for the years then ended;

• and notes to the consolidated financial statements, including a summary of

significant accounting policies

(hereinafter referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material
respects, the consolidated financial position of the Entity as at December 31, 2022 and
December 31, 2021, and its consolidated financial performance and its consolidated
cash flows for the years then ended in accordance with International Financial Reporting
Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the
“Auditor’s Responsibilities for the Audit of the Financial Statements” section of our
auditor’s report.

We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our other
ethical responsibilities in accordance with these requirements.

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

KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global organization of independent
member firms affiliated with KPMG International Limited, a private English company limited by guarantee.
KPMG Canada provides services to KPMG LLP.

Diversified Royalty Corp.
Page 2

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements for the year ended December 31,
2022. These matters were addressed in the context of our audit of the financial
statements as a whole and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.

We have determined the matters described below to be the key audit matters to be
communicated in our auditor’s report.

Assessment of the fair value measurement of the investment in NND LP

Description of the matter

We draw attention to Notes 3(j), 4(b), and 7 to the financial statements. The investment
in Nurse Next Door LP (“NND LP”) is a financial instrument measured at fair value and
has a carrying value of $42,339 thousand. In determining the fair value, the Entity’s
significant assumption is the discount rate used to discount the contractual cash flows
receivable from NND LP.

Why the matter is a key audit matter

We identified the assessment of the fair value measurement of the investment in NND
LP as a key audit matter. This matter represented an area of significant risk of material
misstatement as it required the Entity to determine the discount rate with reference to its
expectations about NND LP’s future operating results and financial condition. Minor
changes in the discount rate used had a significant effect on the fair value of the
investment in NND LP. As a result, specialized skills and knowledge and significant
auditor judgement were required in evaluating the results of our audit procedures.

How the matter was addressed in the audit

The following are the primary procedures we performed to address this key audit matter:

We evaluated the appropriateness of the Entity’s projection of NND LP’s operating
results by comparing the projected results to historical actual results of NND LP, planned
business initiatives, and external industry reports. We also compared the Entity’s
historical projection of NND LP’s operating results to actual operating results to assess
the Entity’s ability to project operating results.

We involved valuation professionals with specialized skills and knowledge, who assisted
in evaluating the discount rate assumption used in the fair value measurement of the
investment in NND LP. The valuation professionals compared the discount rate
assumption against a discount rate range that was independently developed using
publicly available reports of industry commentators for comparable entities. The
valuation professionals considered features and risks specific to the investment in NND
LP.

Diversified Royalty Corp.
Page 3

Assessment of the carrying value of intangible assets

Description of the matter

We draw attention to Notes 3(k), 4(b), and 8(g) to the financial statements.
The intangible assets are measured at historical cost and have a carrying value of
$398,592 thousand. The Entity performs an impairment test over its intangible assets
annually or when events or changes in circumstances indicate that the carrying value
may not be recoverable. Recoverable amount is the higher of fair value less costs of
disposal and value
the recoverable amount of each
intangible asset, the Entity’s significant assumptions include the projected sales
underlying the royalty payment and pre-tax discount rate.

In determining

in use.

Why the matter is a key audit matter

How the matter was addressed in the audit

The following are the primary procedures we performed to address this key audit matter:

We evaluated the appropriateness of the Entity’s projected sales underlying the royalty
payment by comparing the projected sales to historical sales and external industry
reports. When performing this assessment, we considered specific conditions and
events affecting the sales.

We compared the Entity’s historical revenue projections to actual results to assess the
Entity’s ability to accurately project future revenue.

We involved valuation professionals with specialized skills and knowledge, who assisted
in the evaluation of the pre-tax discount rate used in the determination of the
recoverable amount. The valuation professionals evaluated the pre-tax discount rate by
comparing it against a pre-tax discount rate range that was independently developed
using publicly available reports of industry commentators for comparable entities. The
valuation professionals considered features and risks specific to the intangible assets.

Other Information

Management is responsible for the other information. Other information comprises the
information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.

Our opinion on the financial statements does not cover the other information and we do
not and will not express any form of assurance conclusion thereon.

Diversified Royalty Corp.
Page 4

In connection with our audit of the financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge
obtained in the audit and remain alert for indications that the other information appears
to be materially misstated.

We obtained the information included in Management’s Discussion and Analysis filed
with the relevant Canadian Securities Commissions as at the date of this auditor’s
report. If, based on the work we have performed on this other information, we conclude
that there is a material misstatement of this other information, we are required to report
that fact in the auditor’s report.

We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for
the Financial Statements

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

In preparing the financial statements, management is responsible for assessing the
Entity’s ability to continue as a going concern, disclosing as applicable, matters related
to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Entity or to cease operations, or has no realistic alternative
but to do so.

Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditor’s report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will
always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or
in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards,
we exercise professional judgment and maintain professional skepticism throughout the
audit.

Diversified Royalty Corp.
Page 5

We also:

•

Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit 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.

• Evaluate the appropriateness of accounting policies used and the reasonableness

of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management's use of the going concern basis
of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on
the Entity's ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the
related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditor’s report. However, future events or conditions
may cause the Entity to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.

• Communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including
any significant deficiencies in internal control that we identify during our audit.

• Provide those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and communicate with
them all relationships and other matters that may reasonably be thought to bear on
our independence, and where applicable, related safeguards.

Diversified Royalty Corp.
Page 6

• Determine, from the matters communicated with those charged with governance,
those matters that were of most significance in the audit of the financial statements
of the current period and are therefore the key audit matters. We describe these
matters in our auditor’s report unless law or regulation precludes public disclosure
about the matter or when, in extremely rare circumstances, we determine that a
matter should not be communicated in our auditor’s report because the adverse
consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.

The engagement partner on the audit resulting in this auditor’s report is Arnold Singh,
CPA.

Chartered Professional Accountants

Vancouver, Canada
March 9, 2023

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

As at December 31, 2022 and 2021

Assets

Current assets:
Cash
Royalties and management fees receivable
Amounts receivable
Prepaid expenses and other
Interest rate swap assets

Interest rate swap assets
Right-of-use asset and other
Investment in NND LP
Intangible assets

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable and accrued liabilities
Interest rate swap liabilities
Income tax payable
Convertible debentures

Bank loans, net of deferred financing charges
Convertible debentures
Promissory note
Exchangeable units and other
Interest rate swap liabilities
Lease obligation
Deferred income tax liability

Shareholders' equity:
Share capital
Contributed surplus
Equity component of convertible debentures
Accumulated other comprehensive income
Accumulated deficit

Subsequent events (note 24)

Note

December 31, 2022 December 31, 2021

11
13
7
8

11
14
10

9
10
8d
12
11
13
14

7,409
5,575
16
409
2,104
15,513

1,205
801
42,339
398,592

8,939
4,911
11
297
-
14,158

647
897
44,467
320,595

458,450

380,764

5,376
-
1,486
-
6,862

147,905
47,637
3,467
3,716
-
770
14,205

253,139
39,776
5,127
1,165
(65,319)
233,888

2,544
984
2,121
55,968
61,617

109,750
-
3,109
2,008
33
829
11,893

201,972
39,450
2,938
-
(52,835)
191,525

458,450

380,764

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)

For the years ended December 31, 2022 and 2021

Royalty income
Management fees

Expenses:

Salaries and benefits
Share-based compensation
General and administration
Professional fees
Impairment loss (recovery)

Income from operations

Interest expense on credit facilities
Other finance costs, net
Fair value adjustment on financial instruments

Income before income taxes

Income tax expense

Income for the year

Other comprehensive income

Item that may be reclassified subsequently to profit or loss:

Foreign currency translation adjustment
Other comprehensive income for the year

Total comprehensive income for the year

Weighted average number of shares outstanding

Basic
Diluted

Income per share

Basic
Diluted

Note

18
7, 11, 12

17
17

$
$

Years ended December 31,
2021
2022

44,650
533
45,183

2,271
1,176
835
566
7,553
12,401

32,782

(8,911)
(3,300)
2,928

23,499

7,938

15,561

1,165
1,165

16,726

36,818
463
37,281

1,968
1,031
713
463
(1,724)
2,451

34,830

(7,299)
(1,745)
6,898

32,684

9,166

23,518

-
-

23,518

125,607,078
126,833,680

121,866,677
135,548,507

0.12
0.12

$
$

0.19
0.19

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)

For the years ended December 31, 2022 and 2021

Note

Common
shares

Share
capital

Contributed
surplus

Equity
component of
convertible
debentures

Accumulated
other
comprehensive
income

Balance, December 31, 2021

122,559,192

201,972

39,450

2,938

Common shares issued on
public offering
Common shares issued on DRIP
Restricted share units settled
Share-based compensation
Dividends declared
Issuance of convertible debentures
Addition to intangible assets
Comprehensive income

10
8

16,428,900

44,004

1,270,057
81,582
-
-
-

1,083,063

3,545
196
-
-
-
3,422
-

-
(704)
1,030
-
-
-
-

-
-
-
-
2,189
-
-

-
-
-
-
-
-
1,165

Accumulated
deficit

Total
equity

(52,835)

191,525

-
-
-
(28,045)
-
-
15,561

44,004

3,545
(508)
1,030
(28,045)
2,189
3,422
16,726

Balance, December 31, 2022

141,422,794

253,139

39,776

5,127

1,165

(65,319)

233,888

Note

Common
shares

Share
capital

Contributed
surplus

Equity
component of
convertible
debentures

Accumulated
other
comprehensive
income

Balance, December 31, 2020

121,187,757

198,570

39,425

2,938

Common shares issued on DRIP
Restricted share units settled
Share-based compensation
Dividends declared
Comprehensive income

1,160,825
210,610
-
-
-

2,979
423
-
-
-

-
(883)
908
-
-

-
-
-
-
-

Balance, December 31, 2021

122,559,192

201,972

39,450

2,938

-
-
-
-
-

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

Accumulated
deficit

Total
equity

(51,260)

189,673

-
-
-
(25,093)
23,518

2,979
(460)
908
(25,093)
23,518

(52,835)

191,525

Years ended December 31,
2021

2022

15,561

23,518

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

For the years ended December 31, 2022 and 2021

Operating activities:
Net income
Adjustments for:
Tax expense
Impairment (recovery) loss
Depreciation expense
Share-based compensation
Fair value adjustments on financial instruments
Interest expense on credit facilities
Other finance costs, net

Interest paid
Interest received
Taxes paid
Distributions received from NND LP
Distributions paid on Exchangeable MRM Units
Changes in non-cash operating items:

Royalties and management fees receivable
Amounts receivable
Prepaid expenses and other
Accounts payable and accrued liabilities
Cash flows generated from operating activities

Financing activities:

Note

12a

Proceeds from issuance of debt
Proceeds from issuance of convertible debentures, net of fees
Proceeds from equity issuance
Payment of lease obligations
RSUs settled in cash
Debt financing costs
Equity issuance costs
Payment of dividends
Repayment of debt
Redemption of convertible debentures

9b
10
15

9a,b
10

Cash flows generated from (used in) financing activities

Investing activities:

Additions to intangible assets
Purchase of fixed assets

Cash flows used in investing activities

Net decrease in cash
Cash, beginning of the year

Effect of foreign exchange rate changes on cash

Cash, end of the year

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

7,938
7,553
100
1,176
(2,928)
8,911
3,300
(8,911)
168
(6,252)
5,005
(327)

(664)
(5)
(761)
(1,487)
28,377

82,316
50,400
46,001
(105)
(238)
(978)
(2,399)
(24,498)
(43,630)
(57,500)
49,369

(79,304)
(4)
(79,308)

(1,562)
8,939
32
7,409

9,166
(1,724)
90
1,031
(6,898)
7,299
1,745
(7,299)
29
(2,717)
4,906
-

(618)
4
(85)
(632)
27,815

11,400
-
-
42
(92)
(373)
-
(22,114)
-
-
(11,138)

(16,712)
(244)
(16,956)

(279)
9,218
-
8,939

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

For the years ended December 31, 2022 and 2021

Diversified Royalty Corp. (“DIV”) is a company domiciled in Canada and governed by the Business Corporations Act (British
Columbia). The consolidated financial statements of DIV as at and for the year ended December 31, 2022 are composed of DIV
and its subsidiaries (together referred to as the “Company”). The head office of the Company is located at 330-609 Granville Street,
Vancouver, BC, V7Y 1A1. The registered office of the Company is located at the 25th Floor, 700 West Georgia Street, Vancouver,
BC, V7Y 1B3. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) and traded under the symbol
“DIV”.

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”). The Company’s Royalty Partners and the respective license and royalty arrangements are
summarized below.

Sutton Group Realty Services Ltd. (“Sutton”): SGRS Royalties Limited Partnership (“SGRS LP”) (an entity controlled by the
Company), owns the trademarks and certain other intellectual property rights utilized by Sutton in its residential real estate
franchise business (the “SGRS Rights”). The Company granted Sutton the licence to use the SGRS Rights in exchange for a
royalty payment currently equal to $64.614 per agent per month (the “Sutton Royalty Rate”) for the number of agents included
in the royalty pool (the “Sutton Royalty Pool”).

Mr. Lube Canada Limited Partnership (“Mr. Lube”): ML Royalties Limited Partnership (“ML LP”) (an entity controlled by the
Company) owns the trademarks and certain other intellectual property rights utilized by Mr. Lube in its business (the “ML
Rights”). The Company granted Mr. Lube the licence to use the ML Rights in exchange for a royalty payment currently equal
to 7.95% of non-tire system sales and 2.50% of tire system sales of Mr. Lube locations in the royalty pool (the “Mr. Lube
Royalty Pool”).

LoyaltyOne Co. (“LoyaltyOne”): AM Royalties Limited Partnership (“AM LP”) (a wholly owned subsidiary of the Company) owns
the Canadian AIR MILES® trademarks and certain Canadian intellectual property rights (collectively, the “AIR MILES® Rights”)
used by LoyaltyOne in operating the AIR MILES® reward program in Canada (the “AIR MILES® Program”). In accordance
with the terms of two license agreements with LoyaltyOne (collectively the “AIR MILES® Licenses”), LoyaltyOne has an
exclusive right to use the AIR MILES® Rights in exchange for a royalty payment equal to 1% of gross billings from the AIR
MILES® Program.

Mr. Mikes Restaurants Corporation (“Mr. Mikes”): MRM Royalties Limited Partnership (“MRM LP”) (an entity controlled by the
Company) owns the trademarks and certain other intellectual property rights utilized by Mr. Mikes in its restaurant business
(the “MRM Rights”). Prior to June 13, 2022, the Company granted Mr. Mikes the licence to use the MRM Rights in exchange
for a royalty payment equal to 4.35% of notional system sales of Mr. Mikes locations in the royalty pool, which was comprised
of 38 Mr. Mikes Restaurants (the “Mr. Mikes Royalty Pool”). As of June 13, 2022, the Company updated the licence to use the
MRM Rights with a royalty payment based on the actual system sales of the Mr. Mikes locations in the royalty pool, which was
comprised of 44 Mr. Mikes Restaurants (the “Amended Mr. Mikes Royalty Pool”) (note 5(d)).

Nurse Next Door Professional Homecare Services Inc. (“Nurse Next Door”): NND Royalties Limited Partnership (“NND LP”)
(an entity that is majority-owned by the Company) has legal ownership of the trademarks and certain other intellectual property
rights utilized by Nurse Next Door Professional Homecare Services Inc. (“Nurse Next Door”) in its premium home care business
(the “NND Rights”) (note 7). NND LP granted Nurse Next Door the licence to use the NND Rights. The Company, through its
ownership of NND LP Class A units, is entitled to receive a cash distribution of $4.8 million per year, which grows at a fixed
rate of 2.0% per annum (the “DIV Distribution Entitlement”).

Oxford Learning Centres, Inc. (“Oxford”): OX Royalties Limited Partnership (“OX LP”) (an entity controlled by the Company)
owns the trademarks and certain other intellectual property rights utilized by Oxford Learning Centres, Inc. (“Oxford”) in its
supplemental education business (the “Oxford Rights”). The Company granted Oxford the licence to use the Oxford Rights in
exchange for a royalty payment currently equal to 7.67% of the gross sales of Oxford locations in the royalty pool (the “Oxford
Royalty Pool”).

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

For the years ended December 31, 2022 and 2021

1. Nature of operations (continued):

Stratus Building Solutions Franchising, LLC (“Stratus”) (a US based company): Strat-B Royalties Limited Partnership (“Strat-
B LP”) (an entity controlled by the Company) owns the trademarks and certain other intellectual property rights utilized by
Stratus in its business (the “Stratus Rights”). The Company granted Stratus the licence to use the Stratus Rights in exchange
for a royalty payment currently equal to US$6.0 million per annum which grows at a rate of 5% in 2023, 2024, 2025 and 2026
and 4% thereafter.

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”) as issued by the International Accounting Standards Board (IASB). The consolidated financial
statements were authorized and approved for issue by the Company’s Board of Directors on March 9, 2023.

(b) Basis of measurement:

These financial statements have been prepared on the historical cost basis except for its Investment in NND LP, interest
rate swaps, the MRM Units (defined below) and the ML Units (defined below), which are measured at fair value.

These consolidated financial statements are presented in Canadian dollars (“CAD”).

The financial statements for the Company and each of the Company’s subsidiaries are prepared using their functional
currencies. Functional currency is the currency of the primary economic environment in which each of the entities operates.
The functional currency of Strat-B LP is the United States dollar (“USD”). All other entities in the Company have a Canadian
dollar functional currency. References to “$” or “CAD” are related to Canadian dollars, while references to “US$” or “USD”
are related to United States (“US”) dollars.

Subsidiaries whose functional currencies differ from the presentation currency are translated into Canadian dollars as
follows: assets and liabilities at the closing rate as at the reporting date, equity at the historical rate and income and
expenses at the average rate of the period. All resulting changes are recognized in other comprehensive income as
cumulative translation differences.

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, SGRS LP, ML LP, AM LP, MRM LP, NND Holdings
Limited Partnership (“NNDH LP”), OX LP and Strat-B LP and the respective general partners. All significant intercompany
transactions and balances have been eliminated on consolidation.

(b) Cash:

Cash consists of cash on hand, balances on deposit with Canadian chartered banks.

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

For the years ended December 31, 2022 and 2021

3. Significant accounting policies (continued):

The Company has two revenue streams, royalty income and management fees.

 Royalty income: The Company licenses its intellectual property rights to third parties in exchange for royalty payments.

The royalty income is recognized based on the usage or sales that have occurred during the period.

 Management fees: The Company provides strategic and other services to certain royalty partners in exchange for a

fixed monthly fee. Management fee is recognized as earned over the term of the agreement.

Royalty income and management fees for Mr. Lube, Sutton and Oxford are usually receivable within 21 days after the
calendar month. Royalty income and management fees for Mr. Mikes are receivable 21 days after a specified four-week
royalty period. Royalty income from the AIR MILES Program is usually receivable within 14 days after the calendar quarter.
Royalty income from Stratus is usually receivable within 25 days after the calendar month.

(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 of disposal 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 not been recognized.

(f) Dividends to DIV shareholders:

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

(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, restricted share units, convertible debentures and exchangeable units.

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

For the years ended December 31, 2022 and 2021

3. Significant accounting policies (continued):

(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.

RSUs that have a net settlement feature for withholding tax obligations are classified in their entirety as equity-settled.

(i)

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.

Foreign withholding taxes, including United States federal withholding taxes at a rate of 10% of gross royalty income
generated from sources within the United States, are recognized as a payment in lieu of Canadian federal and provincial
current tax to the extent that they may be recovered by the Company as a foreign tax credit against its current tax liabilities
arising in Canada.

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

For the years ended December 31, 2022 and 2021

3. Significant accounting policies (continued):

(j) Financial instruments:

Financial assets are classified and measured based on the business model in which they are held and the characteristics
of their cash flows. At initial recognition, all financial assets classified as amortized cost and fair value through other
comprehensive income (“FVOCI”) are measured at fair value plus transaction costs that are directly attributable to its
acquisition.

The Company classifies its financial assets in the following categories:

Financial assets at amortized cost: A financial asset is measured at amortized cost if it meets both of the following
conditions and is not designated as FVTPL: it is held in a business model whose objective is to hold the asset to collect
contractual cash flows and the contractual terms give rise on specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding. Financial assets within this category are subsequently
measured at amortized cost using the effective interest method. Interest income, foreign exchange gains and losses,
impairment losses and gain or loss on de-recognition are recognized in profit or loss.

Debt investments at FVOCI: A debt instrument is classified as FVOCI if it meets both of the following conditions and
is not designated as FVTPL: it is held in a business model whose objective is achieved by collecting contractual cash
flows and the sale of the financial asset and the contractual terms give rise on specified dates to cash flows that are
solely payments of principal and interest on the principal amount outstanding. Financial assets within this category
are subsequently measured at fair value. Interest income, dividend income and foreign exchange gains and losses
are recognized in profit or loss. Other gains and losses are recognized in other comprehensive income (“OCI”) and
are reclassified to profit or loss on de-recognition.

 Equity investments at FVOCI: On initial recognition of an equity instrument that is not held for trading, the
Company may irrevocably elect to present subsequent changes in the investment’s fair value in OCI. This
election is made on an investment-by-investment basis. Financial assets within this category are subsequently
measured at fair value. Dividend income and foreign exchange gains and losses are recognized in profit or loss.
Other gains and losses are recognized in OCI and are never reclassified to profit or loss.



Financial assets at fair value through profit or loss (“FVTPL”): Financial assets not classified as amortized cost or
FVOCI are measured at FVTPL. This includes all derivative financial instruments. On initial recognition, the Company
may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortized cost
or at FVOCI at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise
arise. These assets are subsequently measured at fair value, with net gains or losses, including any interest or
dividend income, recognized through profit or loss.

Financial liabilities are classified as measured at amortized cost or FVTPL. Once the classification of a financial liability
has been determined, reclassification is not permitted.



Financial liabilities at amortized cost: A financial liability is measured at amortized cost using the effective interest
method if it is not designated as FVTPL. Interest expense and foreign exchange gains and losses are recognized in
profit or loss.

Financial liabilities at FVTPL: A financial liability is classified as FVTPL if it is classified as held-for-trading, it is a
derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value
and net gains and losses, including any interest expense are recognized in profit or loss. For financial liabilities
classified as FVTPL, changes in credit risk will be recognized in other comprehensive income, with the remainder of
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.

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.

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

For the years ended December 31, 2022 and 2021

3. Significant accounting policies (continued):

(j) Financial instruments (continued):

The Company has elected as an accounting policy choice for non-substantial modifications of variable or fixed rate debt,
if certain criteria are met, to adjust the carrying amount of the financial liability on modification for directly attributable
transaction costs and any consideration paid to or received from the counterparty. The effective interest rate is then
adjusted to amortize the difference between the revised carrying amount and the expected cash flows over the life of the
modified instrument. No gain or loss is recognized in profit or loss. This accounting policy applies to variable or fixed rate
debt that had an insignificant original issue discount that can be prepaid at par, or prepaid with insignificant prepayment
fees, to the extent that modification has the effect of repricing the debt to a market rate of interest.

(k)

Impairment of financial assets:

The Company uses an expected credit loss (“ECL”) impairment model. The ECL impairment model applies to financial
assets measured at cost, contract assets and debt investments at FVOCI, but not to investments in equity instruments.
The Company has elected to use the lifetime ECL approach. Under this approach, the impairment allowance is recorded
as a result of all possible default events over the expected life of the financial asset. ECLs are a probability-weighted
estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between
the cash flows due to the Company in accordance with the contract and the cash flows that the Company expects to
receive) and are discounted at the effective interest rate of the financial asset. The Company considers reasonable and
supportable information when assessing the credit risk of a financial asset and in estimating the ECLs, which includes:

 Significant financial difficulty of the Company’s counterparty;

 Delinquencies in interest or principal payments over 30 days; and



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

ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash
shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows
that the Company expects to receive). ECLs are discounted at the effective interest rate of the asset.

(l) 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.

(m) Leases:

IFRS 16 has a single on-balance sheet lease accounting model for lessees. At inception of a contract, the Company
assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. A lessee recognizes a right-of-use
(“ROU”) asset representing its right to use the underlying asset and a lease liability representing its obligation to make
lease payments.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease
payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to
dismantle and remove the underlying asset or to restore the underlying asset, less any lease incentives received. The
ROU asset is subsequently depreciated using the straight-line method from the commencement date to the end of the
lease term. The lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted using the Company’s incremental borrowing rate.

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

For the years ended December 31, 2022 and 2021

3. Significant accounting policies (continued):

(m) Leases (continued):

The lease obligation is measured at amortized cost using the effective interest method and remeasured when there is a
change in future lease payments. Changes in future lease payments can arise from a change in an index or rate, if there
is a change in the Company’s estimate of the expected payable under a residual value guarantee, or if the Company
changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease obligation
is remeasured, a corresponding adjustment is made to the carrying amount of the ROU asset or is recorded in profit or
loss if the carrying amount of the ROU asset has been reduced to zero.

4. 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.

(a) Critical judgments:

 Consolidation:

In applying the criteria outlined in IFRS 10, Consolidated Financial Statements, judgment is required in determining
whether DIV controls SGRS LP, ML LP, MRM LP, NND LP, OX LP and Strat-B 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 SGRS LP, ML LP, MRM LP, OX LP
and Strat-B LP through its majority ownership of the respective general partners.

Although DIV has 99% ownership over the general partner of NND LP, management has determined that the definition
of control pursuant to IFRS 10 is not met as DIV does not have the ability to direct the activities that most significantly
affect the returns of NND LP.

 Control of NND Rights:

In determining whether the Company controls an asset, the Company takes into consideration the control model in
IFRS 15, Revenues (“IFRS 15”), and if there is an agreement to repurchase the asset. If an entity has a right to
repurchase the asset, the buyer does not obtain control of the asset because the buyer is limited in its ability to direct
the use of, and obtain substantially all of the remaining benefits from, the assets even though the buyer may have
physical possession of the asset.

Nurse Next Door has the ability to repurchase the NND Rights from NND LP (the “NND Buy-Out Option”) at any time
after November 15, 2026. Due to the NND Buy-Out Option, in accordance with IFRS 15, NND LP does not have
control over the NND Rights and cannot recognize the NND Rights as an intangible asset on its books. Instead, the
transaction is accounted for as a financing arrangement.

 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. The Company has
determined that the transactions related to the SGRS Rights, ML Rights, AM Rights, MRM Rights, Oxford Rights and
Stratus Rights were asset acquisitions and the acquisition-related costs were capitalized to the intangible asset.

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

For the years ended December 31, 2022 and 2021

4. Use of estimates and judgments (continued):

(a) Critical judgments (continued):



Fair value of exchangeable partnership units in SGRS LP, ML LP, MRM LP and OX 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; however, once the relevant criteria has been met, they
convert into exchangeable units which are then fair valued so long as they remain outstanding (note 12).

(b) 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, which is dependent on a number of different
assumptions that requires management to exercise judgment, to determine if impairment exists. These assumptions
include the projected sales underlying the royalty payment, as well as the pre-tax discount rate used to determine the
value-in-use. As a result, the estimated cash flows that the intangible assets are expected to generate could differ
materially from actual results.

 Valuation of the Investment in NND LP:

The Company’s investment in NND LP is a financial instrument recorded at fair value. The valuation of NND LP
includes an estimate of the discounted cash flows receivable from Nurse Next Door and takes into consideration a
number of different variables that requires management to exercise judgment. These judgments include the discount
rate used to calculate the fair value of the contractual cash flows receivable, the likelihood of Nurse Next Door
exercising the NND Buy-Out Option and the likelihood of Nurse Next Door exercising its right to exchange NND LP
Class B units for DIV shares (or cash at DIV’s option), subject to meeting certain criteria (the “NND Exchange
Mechanism”). As a result, the estimated cash flows that the investment in NND LP are expected to generate could
differ materially from actual results.

5. Royalty income:

Mr. Lube
AIR MILES®
Mr. Mikes1
Oxford
Sutton
Stratus2

Years ended December 31,
2021
19,236
6,570

2022
23,708
6,497

5,060
4,199
4,146
1,040
44,650

3,337
3,610
4,065
-
36,818

1) For the year ended December 31, 2022, Mr. Mikes royalty income includes payments in aggregate of $1.30 million, representing partial

payment of deferred contractual royalty fees, which have been recognized as revenue upon collection.

2) Stratus royalty income for the year ended December 31, 2022 was US$0.77 million, translated at a foreign exchange rate of $1.3521 to

US$1.

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

For the years ended December 31, 2022 and 2021

5. Royalty income (continued):

(a) Mr. Lube:

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”). 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(a)).

Mr. Lube launched a new tire program launched in September 2017. Pursuant to the amended licence and royalty
agreement effective September 18, 2017, ML LP 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% at that time on all other system sales) for the locations
in the Mr. Lube Royalty Pool. On May 1, 2018, the Mr. Lube Royalty Rate on non-tire sales was increased from 6.95% to
7.45% and on May 1, 2021, the Mr. Lube Royalty Rate on non-tire sales was increased from 7.45% to 7.95%.

Effective May 1, 2021, the Mr. Lube Royalty Pool was adjusted to include the royalties from thirteen new Mr. Lube
locations, increasing the Mr. Lube Royalty Pool to 135 locations. Effective May 1, 2022, the Mr. Lube Royalty Pool was
adjusted to include the royalties from 6 new Mr. Lube locations and to remove two Mr. Lube locations for which make-
whole payments were being made due to the store closures in 2021. With the adjustment for these six new locations and
two closures, the Mr. Lube Royalty Pool increased to 139 locations effective May 1, 2022.

For the year ended December 31, 2022, the royalty paid by Mr. Lube included non-tire make-whole payments of $0.7
million (2021 – $0.4 million) for two stores that closed on August 13 and November 28, 2021.

(b) AIR MILES:

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.

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(c)).

Effective July 1, 2022, the monthly Sutton Royalty Rate increased from $63.347 per agent to $64.614 per agent,
representing the 2.0% annual contractual increase in the Sutton Royalty Rate for 2022.

(d) Mr. Mikes:

Pursuant to the terms of the licence and royalty agreement between Mr. Mikes and MRM LP dated May 20, 2019 (the “Mr.
Mikes Licence and Royalty Agreement”), the royalty paid by Mr. Mikes to MRM LP is calculated by multiplying the notional
system sales of restaurants in the Mr. Mikes Royalty Pool by an agreed royalty rate, which is initially set at 4.35%.

On November 9, 2022, DIV, its subsidiaries MRM LP and MRM Royalties GP Inc. (“MRM GP”) and Mr. Mikes, entered
into amendments to certain of the agreements governing the royalty and related arrangements between the parties
(collectively the “Amended MRM Royalty Agreements”), which are retroactively applied and effective as of June 13, 2022.
Pursuant to the Amended MRM Royalty Agreements, the royalty paid by Mr. Mikes to MRM LP is calculated by multiplying
the actual system sales of the restaurants in the Amended Mr. Mikes Royalty Pool by the agreed royalty rate, which
remains unchanged at 4.35%. Accordingly, the Mr. Mikes royalty is now a variable top-line royalty as opposed to a fixed
royalty.

As of the date of these financial statements, DIV has deferred a total of $0.2 million (2021 - $1.3 million) of contractual
amounts otherwise owing, which will be recognized upon collection.

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

For the years ended December 31, 2022 and 2021

5. Royalty income (continued):

(e) Oxford:

Pursuant to the terms of the licence and royalty agreement between Oxford and OX LP dated February 20, 2020 (the “OX
Licence and Royalty Agreement”), the royalty paid by Oxford to OX LP is calculated by multiplying the gross sales of the
locations in the Oxford Royalty Pool by a royalty rate equal to 7.67%.

(f) Stratus:

Pursuant to the terms of the licence and royalty agreement between Stratus and Strat-B LP dated November 15, 2022
(the “Strat-B Licence and Royalty Agreement”), the royalty paid by Stratus to Strat-B LP is US$6.0 million per annum, net
of withholding tax (note 3(i)), and which grows at a rate of 5% in 2023, 2024, 2025 and 2026 and 4% thereafter.

6. Royalties and management fees receivable:

Mr. Lube
AIR MILES®
Stratus1
Oxford
Mr. Mikes
Sutton
Nurse Next Door

December 31,
2022
2,102
1,641
612
445
392
376
7
5,575

December 31,
2021
2,003
1,813
-
353
366
369
7
4,911

1) Stratus royalty receivable was US$0.45 million at December 31, 2022, translated at a foreign exchange rate of $1.3544 to US$1.

The Company subsequently collected all royalties and management fees receivable at December 31, 2022 in January 2023.

Investment in NND LP:

On November 15, 2019, DIV subscribed to NND LP Class A units for a cash purchase price of $52.0 million, and Nurse Next
Door subscribed to NND LP Class B units for an agreed value of $23.0 million. On November 15, 2019, NND LP licensed the
NND Rights to Nurse Next Door for 99 years in exchange for a gross royalty equal to the greater of: (i) 6% of gross sales from
Nurse Next Door’s franchises and corporate stores in Canada and the United States, and (ii) $4.8 million per year, which
increases at a fixed rate of 2.0% per annum. Subject to certain royalty coverage tests being met, Nurse Next Door is able to
sell additional royalties to NND LP commencing in February 1, 2021. In consideration for the incremental royalty, Nurse Next
Door will be entitled, subject to TSX approval, to indirectly exchange its NND LP Class B Units for common shares of DIV, or
cash at DIV’s election.

The Company, through its ownership of NND LP Class A units, is entitled to receive a cash distribution of $4.8 million per year,
which grows at a fixed rate of 2.0% per annum (the “DIV Distribution Entitlement”). To the extent the gross royalty is greater
than the DIV Distribution Entitlement, Nurse Next Door is entitled to receive the excess amount in the form of a cash distribution
through its ownership of NND LP Class B units. Under the terms of the governance agreement dated November 15, 2019
between DIV, Nurse Next Door and other parties (the “NND Governance Agreement”), Nurse Next Door has the right at any
time after November 15, 2026 to buy back the NND Rights at a price determined in accordance with a formula outlined in the
NND Governance Agreement upon any exercise of such right.

Due to the NND Buy-Out Option, NND LP does not have control (per IFRS 15) over the NND Rights and cannot recognize the
NND Rights as an intangible asset on its books. Instead, the transaction is accounted for as a financing arrangement, and the
Company’s investment in NND LP is a financial instrument measured at fair value. The cash distributions received by the
Company from NND LP are recorded as a reduction in its investment in NND LP. For the year ended December 31, 2022, the
DIV Distribution Entitlement was $5.0 million, gross and net of expenses incurred by NND LP (December 31, 2021 - $4.9
million, gross and net of expenses incurred by NND LP).

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

For the years ended December 31, 2022 and 2021

Investment in NND LP (continued):

The valuation of the financial instrument includes an estimate of the discounted cash flow receivable from Nurse Next Door
and takes into consideration the likelihood of Nurse Next Door exercising the NND Buy-Out Option and the NND Exchange
Mechanism. The NND Buy-Out Option and NND Exchange Mechanism are embedded derivatives with a negligible value at
December 31, 2022 and 2021. The contractual cash flows receivable from Nurse Next Door were discounted at a rate of 14.4%
(2021 - 13.9%). The total fair value of NND LP was $42.3 million (2021 - $44.5 million) and a fair value gain of $2.9 million was
recorded during the year ended December 31, 2022 (2021 – fair value gain of $5.7 million). A one percentage point increase
in the discount rate would decrease the fair value by $3.1 million (2021 - $4.4 million). A one percentage point decrease in the
discount rate would increase the fair value by $3.6 million (2021 - $2.7 million).

Intangible assets:

Balance, December 31, 2020
Additions
Reversal (Impairment)(2)

Balance, December 31, 2021
Additions
Foreign Exchange
Reversal (Impairment)(2)

ML Rights

AIR MILES

SGRS Rights

(a)
152,988
17,970

(b)
53,977
-

MRM Rights Oxford Rights Stratus Rights
(f) (1)
-
$
-

(d)
23,369
-

(e)
38,294
-

Total

300,901
17,970

(5,167)

5,681

1,210

1,724

170,958
4,277
-

48,810
-
-

32,273
-
-

29,050
-
-

39,504
-
-

-
$
79,700
1,573

320,595
83,977
1,573

(14,357)

(3,999)

8,956

1,847

(7,553)

Balance, December 31, 2022
1) On acquisition, the Stratus Rights were added to intangible assets at the purchase price of US$59.4 million plus the directly attributable acquisition costs of
US$0.6 million translated at the historical foreign exchange rate on November 15, 2022, of $1.3282 to US$1. At December 31, 2022, the Stratus Rights were
translated at the period end rate of $1.3544 to US$1, giving rise to a $1.6 million foreign exchange gain recorded to other comprehensive income.

398,592

175,235

38,006

81,273

28,274

41,351

34,453

2) Refer to note 8(g).

(a) ML Rights:

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.

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, or settled in cash at DIV’s option, pursuant to the Mr. Lube Exchange Agreement.

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

For the years ended December 31, 2022 and 2021

Intangible assets (continued):

(a) ML Rights (continued):

On November 9, 2020, DIV and Mr. Lube amended and restated the limited partnership agreement of ML LP (the “LP
Agreement”) to confirm the terms on which (i) the Mr. Lube royalty rate on non-tire sales at flagship locations would be
increased by 0.5% from 7.45% to 7.95% effective May 1, 2021, and (ii) the Mr. Lube Royalty Pool would be adjusted to
include royalties from 13 additional Mr. Lube locations effective May 1, 2021. The increase of the Mr. Lube royalty rate on
non-tire sales represents the second such royalty rate increase and the royalty rate on tire sales remained unchanged at
2.50%. The total consideration for the increase of the Mr. Lube Royalty Rate was $8.3 million, calculated based on a 7.25x
multiple of the incremental annual royalty revenue, and was paid to Mr. Lube on May 1, 2021 in cash and recorded as an
addition to intangible assets.

The initial consideration for the 13 Mr. Lube locations added to the Mr. Lube Royalty Pool was $7.7 million was paid on
May 1, 2021, representing 80% of the total estimated consideration of $9.6 million calculated based on a 7.25x multiple
of the incremental annual royalty revenue. The remaining consideration payable for the net additional royalty revenue
related to 7 of the 13 locations was paid to Mr. Lube on May 1, 2022 and the payment was adjusted to reflect the actual
system sales of these locations for the year ending December 31, 2021. The remaining consideration payable for the net
additional royalty revenue related to 6 of the 13 locations will be paid to Mr. Lube on May 1, 2023 in cash. As at
December 31, 2022, the remaining consideration payable to Mr. Lube was adjusted to $2.8 million, reflecting the actual
system sales of these locations for the year ending December 31, 2022, and recorded to accounts payable and accrued
liabilities.

On May 1, 2021, DIV also paid Mr. Lube a remaining $0.9 million of cash consideration for the additions to the Mr. Lube
Royalty Pool that occurred on May 1, 2019. The cash consideration paid was equal to the lower of: (i) $3.1822 per share
and (ii) the weighted average share price of the Company’s shares over the 20 trading days ending on April 26, 2021, the
fifth trading day before May 1, 2021, which was determined to be $2.4941 per share.

On May 1, 2022, the Mr. Lube Royalty Pool was adjusted to include the royalties from 6 new Mr. Lube locations and to
remove two Mr. Lube locations for which make-whole payments were being made due to the store closures in 2021. The
initial consideration for the addition of 6 new stores to the Mr. Lube Royalty Pool was determined to be $3.4 million,
representing 80% of the total consideration of $4.3 million, based on the forecast system sales of these 6 locations for the
2022 fiscal year. DIV elected to pay the initial consideration in shares and issued 1,083,063 DIV shares to Mr. Lube,
valued at $3.1592 per share based on the weighted average share price of the Company’s shares over the 20 trading
days ending on April 25, 2022, the fifth trading day before May 1, 2022. In exchange for the addition to the Mr. Lube
Royalty Pool, Mr. Lube received the right to exchange Class B LP units of ML LP (the “ML Units”) for common shares of
DIV.

The remaining 20% consideration payable for the additional royalty revenue related to the 6 locations will be paid to Mr.
Lube on May 1, 2023 in either cash or shares, at DIV’s election. As at December 31, 2022, the remaining consideration
payable to Mr. Lube was adjusted to $2.6 million reflecting the actual system sales of the 6 locations for the year ending
December 31, 2022, and recorded to exchangeable units and other, given DIV’s intention to pay the remaining
consideration in shares (the “Additional Shares”). In addition, ML LP will also be required to pay Mr. Lube an amount of
approximately $0.2 million in cash on May 1, 2023 equal to the dividends Mr. Lube would have received during the period
from May 1, 2022 to May 1, 2023 had the Additional Shares been issued on May 1, 2022.

(b) AIR MILES Rights:

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.

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(c)).

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

For the years ended December 31, 2022 and 2021

Intangible assets (continued):

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, or settled in cash at DIV’s option, pursuant to the Sutton
Exchange Agreement.

(d) MRM Rights:

On May 20, 2019, the Company acquired, through MRM LP, the MRM Rights for $43.2 million. The purchase price was
satisfied by a cash payment of $37.1 million, the issuance of 1,000,000,000 Class B and Class C units of MRM LP having
an agreed value of $1.15 million to Mr. Mikes, and a promissory note of $4.95 million, payable subject to certain conditions
being met. The cash payment was financed by cash on hand of $37.1 million, which was subsequently partially refinanced
by the issuance of $10.3 million of debt (note 9(b)). The promissory note was initially recorded at a fair value and is
subsequently measured at amortized cost using the effective interest method. In addition, $0.2 million in costs incurred
for the acquisition of the MRM Rights were capitalized as part of the purchase.

Pursuant to the Amended MRM Royalty Agreements (note 5(d)), Mr. Mikes will be permitted, on April 1st of each year, to
add eligible new Mr. Mikes locations to the Amended Mr. Mikes Royalty Pool less gross sales from Mr. Mikes restaurants
that were permanently closed during the preceding calendar year, subject to Mr. Mikes meeting the required royalty
coverage test. In consideration for the addition of the net eligible new Mr. Mikes locations to the Amended Mr. Mikes
Royalty Pool, Mr. Mikes will initially be entitled to payment in cash, which payments will be deducted against the
outstanding balance owing by MRM LP on the promissory note (the “Amended Note”), and thereafter to exchange certain
units of MRM LP held by Mr. Mikes for common shares of DIV subject to the approval of the TSX or cash at DIV’s election.
The Amended Note is deducted by payment amounts calculated based on a multiple of 8.5x, multiplied by the net royalty
revenue attributable to the net eligible new Mr. Mikes locations added to the Amended Mr. Mikes Royalty Pool, with other
adjustments.

The Class B and Class C units are exchangeable into common shares of the Company through certain agreements among
Mr. Mikes, MRM Royalties GP Inc. and the Company, in each case, upon satisfaction of certain performance criteria and
the approval of the TSX. The Class B units become exchangeable into common shares of the Company upon adding net
eligible new Mr. Mikes locations to the Amended Mr. Mikes Royalty Pool (excluding the locations attributable to deduction
against the Amended Note). In return for adding these net sales to the Mr. Mikes Royalty Pool, Mr. Mikes receives the
right to indirectly acquire common shares of the Company through the exchange of Class B LP units of MRM LP (the
“MRM Additional Entitlement”). The Class C units become exchangeable into common shares of the Company upon
increases in the MRM Royalty Rate, which may continue to be in increments of 0.25% six times during the life of the
royalty, in accordance with the Amended MRM Royalty Agreements. On May 20, 2019 and as at December 31, 2022, the
total number of exchangeable Class B and Class C units was 355,032, and represents a retained interest in MRM LP (the
“Initial Retained Interest”) of approximately 4.1% (note 12(a)). The Initial Retained Interest must be held in perpetuity and
cannot be exchanged by Mr. Mikes for common shares of DIV without DIV’s prior written approval and the approval of the
TSX.

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

For the years ended December 31, 2022 and 2021

Intangible assets (continued):

(d) MRM Rights (continued):

The MRM Additional Entitlement is determined based on the estimated net-tax-adjusted royalty revenue added to the
Amended Mr. Mikes Royalty Pool (adjusted by a 10% discount), divided by the yield of the Company’s shares, divided by
the weighted average share price of the Company’s shares of the 20 trading days ending on the fifth trading day preceding
the last day of February, with other adjustments. Mr. Mikes receives 80% of the estimated MRM Additional Entitlement
initially, with the balance received on April 1 of the subsequent year when the actual full year performance of the new
locations is known with certainty. The MRM Additional Entitlement is exchanged by Mr. Mikes into common shares of DIV,
or settled in cash at DIV’s option, pursuant to the Amended MRM Royalty Agreements.

In addition to the royalty payable to MRM LP, Mr. Mikes will pay the Company a management fee of approximately $0.04
million per year for strategic and other services. The management fee will be increased at a rate of 2.5% per annum over
the term of the Amended MRM Royalty Agreements. During the year ended December 31, 2022, due to a change in the
expected timing of the settlement of the promissory note, a $0.2 million loss (2021 - $0.1 million gain) was recorded in
other finance costs (note 18).

(e) Oxford Rights:

On February 20, 2020, the Company indirectly acquired, through OX LP, the Oxford Rights for a purchase price of $44.0
million, plus a retained interest provided to Oxford through the issuance of 10,493 Ordinary LP units, 100,000,000 Class
B, 100,000,000 Class C, 100,000,000 Class D, 100,000,000 Class E, 100,000,000 Class F, 100,000,000 Class G, and
100,000,000 Class H limited partner units of OX LP having an agreed value of approximately $33,000.

The cash purchase price of $44.0 million was funded with $37.0 million drawn from DIV’s Acquisition Facility (defined
below, refer to note 9(a)) and DIV’s cash on hand following DIV’s drawdown of the remaining $7.0 million of available
capacity under the NNDH LP term loan facility (note 9(b)). The refundable Goods and Services Tax of $2.2 million payable
by OX LP on the purchase price and estimated transaction costs were funded with a further $2.7 million drawn from the
available capacity under the Acquisition Facility. The Acquisition Facility was subsequently partially repaid in cash using
funds received from the issuance of equity and the issuance of $9.0 million of debt (note 9(b)).

The Class B, Class C, Class D, Class E, Class F, Class G and Class H units are exchangeable into common shares of
the Company through the exchange agreement dated February 20, 2020 among Oxford, OX Royalties GP Inc. and the
Company (the “Oxford Exchange Agreement”) upon the satisfaction of certain performance criteria.

Annually on May 1, the Oxford Royalty Pool may be adjusted, subject to meeting certain criteria, to include gross sales
from new Oxford locations less gross sales from Oxford locations that were permanently closed during the preceding
calendar year. In return for adding these net sales to the Oxford Royalty Pool, Oxford receives the right to indirectly acquire
common shares of the Company through the exchange of Class B units of OX LP (the “OX Additional Entitlement”). The
OX Additional Entitlement is determined based on the estimated net tax-adjusted royalty revenue added to the Oxford
Royalty Pool (adjusted by a 10% discount for locations that were open for business prior to December 31, 2023, or a 7.5%
discount for all other additions), divided by the yield of the Company’s common shares. Oxford receives 80% of the
estimated OX 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 OX Additional Entitlement is automatically
exchanged by Oxford into common shares of DIV, or settled in cash at DIV’s option, pursuant to the Oxford Exchange
Agreement.

The Class C, Class D, Class E, Class F, Class G and Class H units become exchangeable into common shares of the
Company on increases in the Oxford Royalty rate of 0.25% increments six times during the term of the OX Licence and
Royalty Agreement.

In addition to the royalty payable to OX LP, Oxford will pay DIV a management fee of $40,000 per annum for strategic
advice and other services. The management fee will increase by $5,000 every five years over the term of the OX License
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, 2022 and 2021

Intangible assets (continued):

(f) Stratus Rights:

On November 14, 2022, the Company acquired through Strat-B LP, the Stratus Rights for a purchase price of US$59.4
million. The purchase price was funded with $47.0 million drawn from DIV’s existing undrawn Acquisition Facility (defined
below, refer to note 9(a)), a $15 million increase in the senior credit facilities of the Company’s subsidiary ML LP (note
9(b)), and a US$15 million senior credit facility issued to Strat-B LP (note 9(b)). The Acquisition Facility was subsequently
partially repaid in cash using funds received from the issuance of equity (note 15).

Stratus may increase the annual royalty payable on April 1st of each year following the closing date (each an “Adjustment
Date”) subject to Stratus satisfying certain royalty coverage tests. The amount of each royalty increase cannot be less
than US$1.0 million per annum and must, in respect of amounts over that threshold, be in increments of US$0.1 million
per annum. In consideration for a royalty increase on an Adjustment Date, Strat-B LP will pay an amount to Stratus in
cash, based on a formula that is intended to be accretive to DIV.

(g) Impairment assessment:

The Company tests the carrying value of its intangible assets for impairment annually, or when there is an indication that
an asset may be impaired. Impairment exists if the carrying value of the cash-generating unit (“CGU”) is greater than its
recoverable amount.

The Company performed its annual impairment test on its indefinite life intangible assets as at December 31, 2022 and
December 31, 2021. The Company has used the value in use method to determine the recoverable amount for all
impairment testing performed during the years ended December 31, 2022 and December 31, 2021. 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 projected
sales underlying the royalty payment over a five-year period, with a terminal growth rate applied on the expected cash
flows thereafter to reflect the indefinite life of the intangible assets. However, these forecasted cash flows are based on
current and anticipated market conditions, which are inherently uncertain.

The following tables outline the pre-tax discount rate and the terminal value growth rate used in calculating the recoverable
amount for each CGU tested for impairment as at December 31, 2022 and December 31, 2021:

December 31, 2022

ML Rights

AIR MILES SGRS Rights MRM Rights Oxford Rights Stratus Rights

Pre-tax discount rate
Terminal value growth rate

11.7%
2.0%

15.7%
2.0%

16.8%
2.0%

13.0%
2.0%

12.9%
2.0%

13.9%
4.0%

December 31, 2021

ML Rights

AIR MILES SGRS Rights MRM Rights Oxford Rights Stratus Rights

Pre-tax discount rate
Terminal value growth rate

10.7%
2.0%

14.4%
0.5%

14.6%
2.0%

12.7%
2.0%

12.0%
2.0%

N/A
N/A

During the year ended December 31, 2022, the pre-tax discount rate had a range from 11.7% to 16.8% (2021 – 10.7% to
14.6%), and the terminal value growth rate had a range of 2.0% to 4.0% (2021 - range from 0.5% to 2.0%).

In 2021, Mr. Mikes saw a general recovery in the restaurant industry following a $19.8 million impairment loss in 2020 that
was due to the impact of the COVID-19 pandemic on Mr. Mikes’ restaurants and the company’s inability to pay the fixed
royalty payment to DIV in full. The Company concluded, in 2021, that the recoverable amount for the MRM Rights
exceeded the carrying amount, resulting in a non-cash accounting partial reversal of the 2020 impairment charge, recorded
as a gain of $5.7 million through profit or loss. In 2022, Mr. Mikes saw a further recovery back to pre-pandemic levels
comparable to 2019. COVID-19 restrictions were completely lifted in early 2022, and the restaurant industry saw a
significant recovery thereafter. The Company concluded, in 2022, that the recoverable amount for the MRM Rights
exceeded the carrying amount, resulting in a non-cash accounting partial reversal of the 2020 impairment charge, recorded
as a gain of $9.0 million through 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, 2022 and 2021

Intangible assets (continued):

(g) Impairment assessment (continued):

In 2021, following the negative impacts of the COVID-19 pandemic and an impairment loss of $6.1 million recorded in
2020, Oxford saw a recovery due to the relaxing of government restrictions, the transition back to in-person tutoring and
the continued offering of virtual tutoring for most locations. The Company concluded, in 2021, that the recoverable amount
for the OX Rights exceeded the carrying amount, resulting in a non-cash accounting partial reversal of the 2020 impairment
charge, recorded as a gain of $1.2 million through profit or loss. In 2022, Oxford saw continued improvement in its
operations and a return to pre-pandemic performance. The Company concluded, in 2022, that the recoverable amount for
the OX Rights exceeded the carrying amount, resulting in a non-cash accounting partial reversal of the 2020 impairment
charge, recorded as a gain of $1.8 million through profit or loss.

In 2021, LoyaltyOne saw the non-renewal and loss of two sponsors from the AIR MILES Program, and the emergence of
the COVID-19 Omicron variant in November 2021, which negatively impacted results. Based on the assessments
performed, the Company concluded that the carrying amount for the AIR MILES Rights exceeded the recoverable amount.
As a result, the Company recorded an impairment loss of $5.2 million in connection with the AIR MILES Rights for the
year ended December 31, 2021. In 2022, LoyaltyOne saw the loss of another significant AIR MILES sponsor, which
negatively impacted results in the fourth quarter of 2022. Based on the assessments performed, the Company concluded
that the carrying amount for the AIR MILES Rights exceeded the recoverable amount and as a result, the Company
recorded an impairment loss of $14.4 million in connection with the AIR MILES Rights for the year ended
December 31, 2022.

In 2022, the Canadian real estate market experienced a slowdown due to higher inflation and a steady rise in interest
rates. Despite this slowdown, Sutton paid 100% of the fixed royalty and management fee for the year ended
December 31, 2022. Based on the assessments performed, the Company concluded that the carrying amount for the
SGRS Rights exceeded the recoverable amount and as a result, the Company recorded an impairment loss of $4.0 million
in connection with the SGRS Rights for the year ended December 31, 2022. The impact from the rise in the risk-free rate
on the discounted value of contractual cash flows was the predominant driver of impairment. There were no impairments
or reversals related to the SGRS Rights for the year ended December 31, 2021.

As the carrying value of the SGRS Rights, OX Rights, MRM Rights and AIR MILES Rights approximate the estimated
recoverable amount, a subsequent change in any key assumption utilized in the estimate of future cash flows may result
in further adjustments. The Company also considers other reasonably possible scenarios where projected sales
underlying the royalty payment are less than expected, along with other reasonably possible higher discount rates to
determine whether the intangible assets would be impaired under those scenarios. As at December 31, 2022, the
Company also tested the ML Rights in a similar manner described above and determined that the recoverable amount
exceeded the carrying value by approximately $72.1 million (2021 – $72.8 million) and therefore no impairment exists. If
the pre-tax discount rate was 4.2% higher, the recoverable amount would approximate carrying value.

9. Bank loans, net of deferred financing charges:

(a) Acquisition facility:

DIV has a $50.0 million senior secured credit facility (the “Acquisition Facility”) with a Canadian chartered bank. On
April 20, 2022, DIV amended its Acquisition Facility to allow for a one-time advance of up to $9.0 million to be used to
partially fund the repayment of DIV’s outstanding convertible debentures due on December 31, 2022 (“2022 Debentures”)
and to extend the maturity date of the Acquisition Facility to April 20, 2026. The Company incurred transaction costs of
$0.2 million, which were recorded to deferred financing fees on the balance sheet and will be amortized over the term of
the Acquisition Facility.

On November 15, 2022, DIV drew $47.0 million on the Acquisition Facility to fund the purchase price of the acquisition of
the Stratus Rights and on November 24, 2022, subsequent to completion of a public offering on November 23, 2022 (note
15), the Company partially repaid $43.5 million on the Acquisition Facility, of which $3.5 million remains outstanding at
December 31, 2022. Each draw is interest only for the first six months and then amortizes over 60 months beginning
April 15, 2023. The Acquisition Facility, net of deferred financing fees, is measured at amortized cost with a carrying value
of $3.3 million as at December 31, 2022, of which $0.4 million is classified as short-term under accounts payable and
accrued liabilities on the statement of financial position.

As at December 31, 2022 and 2021, the Company was in compliance with all financial covenants associated with its
Acquisition Facility.

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

For the years ended December 31, 2022 and 2021

9. Bank loans, net of deferred financing charges (continued):

(b) Term loan facilities and operating lines of credit:

As at December 31, 2022, the Company had the following term loan facilities and operating lines of credit:

Term loan facilities(1)

Interest rate

Maturity date

Face value

Carrying value

ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
NNDH LP term loan
OX LP term loan
Strat-B LP term loan

67,614
17,283
6,261
10,258
14,427
8,949
20,188
144,980
1) Bank loans on the statement of financial position includes $145 million term loan facilities plus $2.9 million long-term portion of the

BA + 2.00%
BA + 1.95%
BA + 1.95%
BA + 1.95%
BA + 1.90%
BA + 1.95%
SOFR + 2.11%

May 1, 2025
Sep 30, 2026
Jun 30, 2026
Jun 24, 2024
Nov 15, 2024
Apr 27, 2025
Nov 15, 2027

67,870
17,400
6,300
10,300
14,500
9,000
20,316
145,686

As at December 31, 2021, the Company had the following term loan facilities and operating lines of credit:

Acquisition Facility outstanding (note 9(a)).

Operating lines of credit

ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
OX LP term loan
Strat-B LP term loan

Interest rate

Prime + 0.25%
BA + 1.95%
BA + 1.95%
Prime + 0.25%
Prime + 0.25%
SOFR + 2.11%

Maturity date

May 1, 2025
Sep 30, 2026
Jun 30, 2026
Jun 24, 2024
Apr 27, 2025
Nov 15, 2027

Term loan facilities

ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
NNDH LP term loan
OX LP term loan

Operating lines of credit

ML LP term loan
AM LP term loan
SGRS LP term loan
MRM LP term loan
OX LP term loan

Maturity date

May 1, 2025
Sep 30, 2026
Jun 30, 2026
Jun 24, 2024
Nov 15, 2024
Apr 27, 2025

Maturity date

May 1, 2025
Sep 30, 2026
Jun 30, 2026
Jun 24, 2024
Apr 27, 2025

Interest rate

BA + 2.50%
BA + 1.95%
BA + 1.95%
BA + 1.95%
BA + 1.90%
BA + 1.95%

Interest rate

Prime + 0.25%
BA + 1.95%
BA + 1.95%
Prime + 0.25%
Prime + 0.25%

Maximum
available

Available
for use

1,000
3,000
500
500
500
677
6,177

53,000
17,400
6,300
10,300
14,500
9,000
110,500

1,000
3,000
500
500
500
5,500

Face value

Carrying value

Maximum
available

Available
for use

1,000
3,000
500
500
500
677
6,177

52,698
17,254
6,251
10,230
14,389
8,928
109,750

1,000
3,000
500
500
500
5,500

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

For the years ended December 31, 2022 and 2021

9. Bank loans, net of deferred financing charges (continued):

(b) Term loan facilities and operating lines of credit (continued):

ML LP has a credit agreement that originally consisted 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 May 1, 2021, in
connection with the Mr. Lube royalty rate increase and the addition of 13 stores to the Mr. Lube Royalty pool (note 8(a)),
ML LP amended its credit facility agreement, which consists of a non-amortizing term loan facility and an operating line of
credit. The amendment to the ML LP credit facility agreement resulted in an increase to the term loan facility from $41.6
million to $53.0 million, an increase in the interest rate by 0.55%, and an extension of the maturity date from July 31, 2022
to May 1, 2025. On November 15, 2022, in connection with the Stratus acquisition (note 8(f)), ML LP amended its credit
facility agreement with an increase to the term loan facility from $53.0 million to $68.0 million which included a reduction
in the interest rate by 0.50%.

AM LP has a credit agreement that consists of a non-amortizing $17.4 million term loan facility and $3.0 million demand
operating facility from a Canadian chartered bank. 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. On September 13, 2021, AM LP
amended its credit facility agreement, which consists of a non-amortizing term loan facility and an operating line of credit.
The amendment to the AM LP credit facility resulted in a decrease in the interest rate by 0.30% and an extension of the
maturity date from September 6, 2022 to September 30, 2026.

The AM Credit Agreement was amended and restated in March and September 2021 in order to, among other things,
amend the financial covenants for each of the fiscal quarters of 2021 and the first two fiscal quarters of 2022. Subsequently,
in September 2022, the AM Credit Agreement was amended and restated in order to, among other things, amend the
financial covenants for the last two fiscal quarters of 2022. If AM LP had not entered into such amendments, AM LP would
have been in breach of its financial covenants for all fiscal quarters in 2021 and 2022. Refer to subsequent events (note
24) regarding the partial paydown of the AM LP term loan.

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 11, 2021, SGRS
LP amended its credit facility agreement, which consists of a non-amortizing term loan facility and an operating line of
credit. The amendment to the SGRS LP credit facility resulted in a decrease in the interest rate by 0.05% and an extension
of the maturity date from June 30, 2022 to June 30, 2026.

MRM LP has a credit agreement with a Canadian chartered bank that consists of a non-amortizing $10.3 million term loan
and a $0.5 million line of credit. The MRM LP term loan and line of credit are secured by the MRM Rights and the royalties
payable by Mr. Mikes under the Mr. Mikes Licence and Royalty Agreement. In February 2021, MRM LP negotiated a
covenant amendment to its credit agreement, which included a suspension to its financial covenants for the quarters ended
March 31, 2021 and June 30, 2021. In September 2021, MRM LP negotiated a similar covenant amendment that contained
the same suspension for the quarters ended September 30, 2021 and December 31, 2021. If MRM LP had not entered
into such covenant amendment, MRM LP would have been in breach of its financial covenants as of such dates.

NNDH LP, a wholly-owned subsidiary of DIV, has a credit agreement with a Canadian chartered bank that consists of a
non-amortizing $14.5 million term loan. The NNDH LP term loan is secured by the NND Rights and the royalties payable
by Nurse Next Door.

On April 27, 2020, OX LP entered into a credit agreement with a Canadian chartered bank that consists of a non-amortizing
$9.0 million term loan and a $0.5 million line of credit. The OX LP term loan and line of credit are secured by the OX Rights
and the royalties payable by Oxford under the Oxford Licence and Royalty Agreement.

On November 15, 2022, Strat-B LP, a wholly-owned subsidiary of DIV, entered into a credit agreement with a Canadian
chartered bank that consists of a non-amortizing US$15.0 million term loan and US$0.5 million line of credit. The Strat-B
LP loan and line of credit are secured by the Stratus Rights and the royalties payable by Stratus under the Stratus Licence
and Royalty Agreement.

As at December 31, 2022 and 2021, the Company was in compliance with all financial covenants associated with its term
loan facilities and operating lines of credit.

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

For the years ended December 31, 2022 and 2021

10. Convertible debentures:

On March 30, 2022, the Company issued convertible unsecured subordinated debentures (“2027 Debentures”) for an
aggregate principal amount of $52.5 million at a price of $1,000 per debenture (“the Offering”). The 2027 Debentures mature
on June 30, 2027 and bear interest at an annual rate of 6.00% payable semi-annually in arrears on the last day of December
and June in each year, commencing June 30, 2022. At the holder’s option, the 2027 Debentures may be converted into
common shares of the Company at any time prior to the earlier of the last business day immediately preceding June 30, 2027
and the date specified by the Company for redemption. The conversion price will be $4.05 per common share (the “Conversion
Price”), subject to adjustment in certain circumstances.

The 2027 Debentures are not redeemable prior to June 30, 2025, except upon the satisfaction of certain conditions after a
change of control has occurred. On and after June 30, 2025 and prior to June 30, 2026, the 2027 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 June 30, 2026 and prior to the
maturity date, DIV may, at its option, redeem the 2027 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 2027 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 2027 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 debentures by 95% of the then current market
price on the maturity date.

On initial recognition, the Company valued the liability component of the 2027 Debentures at $49.4 million and the equity
component at $3.1 million. In addition, the Company incurred transaction costs of $2.6 million, of which $2.4 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 2027 Debentures, after deferred taxes of $0.8 million, was $2.1 million.

On May 4, 2022, (“Redemption Date”), the Company used the net proceeds from the Offering to complete the $52.5 million
partial redemption of the principal amount of the 2022 Debentures outstanding plus accrued and unpaid interest at 5.25% up
to, but excluding, the Redemption Date.

On December 20, 2022 (the "Final Redemption Date"), the Company redeemed the $5.0 million aggregate principal amount
of 2022 Debentures issued and outstanding in accordance with the notice of redemption to the registered holders of its 2022
Debentures issued on November 9, 2022. The 2022 Debentures were redeemed at a redemption price equal to their principal
amount, plus accrued and unpaid interest thereon up to, but excluding, the Final Redemption Date and the Debentures were
de-listed from TSX subsequently thereafter.

The following table reconciles the principal amount of the 2022 Debentures to the carrying value of the liability component:

Principal amount - 2022 Debentures
Full Redemption - principal amount

Equity component

Unamortized deferred financing fees
Accretion on liability component

Current portion of convertible debentures

2022

57,500
(57,500)

(4,312)

-
4,312

2021

57,500
-

(4,312)

(570)
3,350

55,968

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

For the years ended December 31, 2022 and 2021

10. Convertible debentures (continued):

The following table reconciles the principal amount of the 2027 Debentures to the carrying value of the liability component:

Principal amount - 2027 Debentures

Equity component
Unamortized deferred financing fees
Accretion on liability component

Long-term portion of convertible debentures

11. Interest rate swaps:

2022

52,500

(3,074)
(2,161)
372

47,637

2021

-
-
-

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 a portion of its term loan facilities.

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. There was a fair value gain of $3.7 million on interest rate swaps for the year ended December 31, 2022 (2021 – gain
of $2.0 million). Refer to subsequent events (note 24) for interest rate swaps related to the Strat-B LP term loan.

The following table summarizes the interest rate swap agreements the Company has entered into as of December 31, 2022:

Term loan facilities

Effective date

Maturity date

Fixed interest rate

Notional amount

ML LP1
ML LP2
AM LP3
MRM LP
NNDH LP
OX LP

Jul 29, 2022
Dec 15, 2022
Aug 19, 2022
Jul 25, 2019
Feb 12, 2020
Aug 26, 2020

May 1, 2025
May 1, 2025
Sep 30, 2026
Jun 24, 2024
Nov 15, 2024
Apr 27, 2025

3.75%
6.09%
5.39%
4.05%
3.98%
2.96%

39,750
11,250
8,700
10,300
7,500
4,500

1) On May 1, 2021 ML LP amended its credit facility agreement, which resulted in an increase to its fixed interest rate by 0.55%. On
November 15, 2022, ML LP amended its credit facility agreement, which resulted in a decrease to its fixed interest rate by 0.50%.
2) On December 15, 2022 ML LP entered into a swap agreement with a Canadian chartered bank to swap 75% of the incremental $15

million loan (see note 9(b)). The fixed interest rate includes an interest rate of 4.09% plus credit spread of 2.00%.

3) On September 13, 2021, AM LP amended its credit facility agreement, which resulted in a decrease to its fixed interest rate by 0.30%.

12. Exchangeable Units and Other:

The following table summarizes exchangeable units and other as at December 31, 2022 and 2021:

Mr. Lube Class B Units
Mr. Mike's Class B Units
Mr. Mike's Class C Units
Oxford Minority Interest

December 31,
2022

December 31,
2021

2,625
529
529
33
3,716

975
500
500
33
2,008

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

For the years ended December 31, 2022 and 2021

12. Exchangeable Units and Other (continued):

(a) MRM Units:

Mr. Mikes is entitled to receive distributions from MRM LP on the Initial Retained Interest on a pro rata basis with the
limited partnership units of MRM LP (the “MRM Units”) held by DIV. The MRM Units are recorded as a liability and
measured at fair value. The distributions issued by MRM LP to Mr. Mikes are recorded as an expense in the statements
of net income. During the year ended December 31, 2022, MRM LP issued distributions of $0.3 million (2021 - $nil) to Mr.
Mikes.

The fair value of the MRM Units is determined at the end of each period by multiplying the number of MRM Units held by
Mr. Mikes at the end of the period by the closing price of DIV shares on the last business day of the period. As at
December 31, 2022, the MRM Units were valued at $1.1 million (2021 - $1.0 million) based on the DIV closing share price
of $2.98 at period end (2021 - $2.82), multiplied by the total number of MRM Units of 355,032.

(b) ML Units:

As referenced in note 8(a), the $2.6 million (2021 - $1.0 million) consideration payable for the roll-in of 6 additional stores
on May 1, 2022, was recorded to exchangeable units and other, with changes in the fair value recorded as a fair value
adjustment on financial instruments in the statements of net income.

13. ROU asset and lease obligation:

In December 2020, DIV signed a ten-year lease agreement for its head office and obtained possession in January 2021. Under
IFRS 16, DIV recognized a ROU asset representing its right to use the underlying asset and a lease liability representing its
obligation to make lease payments. During the year ended December 31, 2022, the Company recorded $0.1 million (2021 -
$0.1 million) as depreciation expense for the ROU asset and a nominal amount as other finance costs on the lease obligation.
The Company’s annual fixed lease payments are approximately $0.1 million over the ten-year term of the lease.

14. Income taxes:

The income taxes recognized in the statements of net income are as follows:

Deferred income tax expense
Current income tax expense

Years ended December 31,
2021

2022

2,319
5,619

7,938

5,082
4,084

9,166

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 income before income taxes. The reasons for the difference are as follows:

Income before income taxes
Combined Canadian federal and provincial rates

Expected tax expense

Increased by:
Permanent and other non-deductible differences
Change in unrecognized deferred tax assets

Years ended December 31,
2021

2022

23,499
27%

32,684
27%

6,345

8,825

1,540
53
7,938

341
-
9,166

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

For the years ended December 31, 2022 and 2021

14. Income taxes (continued):

The tax effect of temporary differences that gives rise to the net deferred tax liabilities as at December 31, 2022 and 2021 are
as follows:

Intangible assets
Financing and share issuance costs
Convertible debentures
Other
Intangible assets
Net deferred income tax liability

2022

211
775
(730)
(1,281)
(13,180)
(14,205)

2021

227
93
(260)
(358)
(11,595)
(11,893)

The deferred tax liability as at December 31, 2022 is largely associated with the temporary differences on the Company’s
intangible assets, which have an undepreciated capital cost allowance of approximately $265.8 million (2021 - $199.2 million),
which have increased due to the addition of the Stratus Rights. In addition, pursuant to NND LP’s limited partnership agreement
dated November 15, 2019, its undepreciated capital cost allowance of approximately $44.1 million at December 31, 2022 (2021
- $46.5 million) is allocated to the Company for tax purposes.

Tax attributes are subject to review, and potential adjustment, by competent authority.

15. Share capital:

As at December 31, 2022, the authorized share capital of the Company consists of an unlimited number of common shares.

On November 23, 2022, the Company completed a public offering of 16,428,900 common shares, including 2,142,900 common
shares pursuant to the full exercise of the over-allotment option, at a price of $2.80 per common share, for gross proceeds of
$46.0 million. After deducting issuance costs of $2.7 million, net proceeds were $43.3 million. The deferred tax impact of $0.7
million on the share issue costs was recognized within share capital.

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.

16. Share-based compensation:

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. Under the Plan, the maximum number of common shares available to be granted, as
restricted share units or share options, is 10% of the issued and outstanding common shares of the Company at the time of
the grant.

(a) Restricted share units:

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 the RSUs in cash, in certain instances.

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

For the years ended December 31, 2022 and 2021

16. Share-based compensation (continued):

(a) Restricted share units (continued):

The number of RSUs outstanding as at December 31, 2022 and 2021 are as follows:

Balance, beginning of year
Granted
Dividends earned
Settled
Forfeited
Cancelled

Balance, end of year

Unvested

2022
Weighted
average grant-
date fair value

2.05
2.86
2.88
3.08
-
-

Number of
RSUs

452,178
338,533
52,959
(293,558)

-
-

2021
Weighted
average grant-
date fair value

2.24
2.52
2.64
2.71
2.24
3.04

Number of
RSUs

499,382
405,331
41,170
(431,246)
(46,643)
(15,816)

550,112

2.08

452,178

2.05

550,112

2.08

452,178

2.05

As at December 31, 2022, approximately 44% of the unvested RSUs will vest in 2023, 35% will vest in 2024, and the
remainder in 2025.

(b) Share options:

The following table summarizes the changes in the Company’s share options during the years ended December 31, 2022
and 2021:

Balance, beginning of year
Granted
Expired
Forfeited

2022
Weighted
average
exercise price

3.06
2.80
3.25
-

Number of
options

3,041,667
791,667
(2,250,000)

2021
Weighted
average
exercise price

3.26
2.52
-
3.19

Number of
options

2,300,000
816,667
-
(75,000)

Balance, end of year

1,583,334

2.66

3,041,667

3.06

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

For the years ended December 31, 2022 and 2021

16. Share-based compensation (continued):

(b) Share options (continued):

The following tables summarizes information relating to outstanding and exercisable options as at December 31, 2022
and 2021:

Expiry Date

May 6, 2026
January 1, 2027

Balance, December 31, 2022

Expiry Date

November 23, 2022
October 11, 2022
May 6, 2026

Balance, December 31, 2021

Exercise Price
2.52
2.80

Exercise Price

3.53
3.22
2.52

Weighted average
remaining life
(years)
3.35
4.01
3.68

Weighted average
remaining life
(years)
0.90
0.78
4.35
1.72

Options outstanding Options exercisable
527,778
263,889
791,667

791,667
791,667
1,583,334

Options outstanding Options exercisable
250,000
2,000,000
263,889
2,513,889

250,000
2,000,000
791,667
3,041,667

The weighted average assumptions used in calculating the fair values of options granted in 2022 and 2021 are as follows:

Risk free rate
Expected life
Expected volatility
Forfeiture rate
Expected dividends

17. Income per share:

Income for the year - basic

Interest expense on convertible debentures, net of tax(1)

Income for the year - diluted

Weighted average number of shares outstanding - basic
Effective impact of dilutive securities:

Share options
RSUs
Convertible debentures - current & long term(1)
Exchangeable MRM units

Weighted average number of shares outstanding - diluted

Income per share

Basic
Diluted

2022
1.39%
5.0 years
34.30%
Nil
7.75%

2021
0.91%
5.0 years
33.92%
Nil
7.87%

Year ended December 31,
2021
2022

15,561

23,518

2,204

25,722

125,607,078

121,866,677

126,320
745,250

355,032

27,252
662,184
12,637,363
355,032

126,833,680

135,548,507

0.12
0.12

$
$

0.19
0.19

$
$

1) For the year ended December 31, 2022, the interest expense on convertible debentures and the effective impact from convertible

debentures on securities is excluded from the income per share calculation as the impact is anti-dilutive.

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

For the years ended December 31, 2022 and 2021

18. Other finance costs, net:

Finance income
Foreign exchange gain
Fair value adjustment on promissory note
Distributions on Exchangeable Units
Amortization of deferred financing charges
Accretion expense and other

19. Financial instruments:

Year ended December 31,
2021

2022

168
32
(215)
(518)
(851)
(1,916)

(3,300)

-
143
-
(831)
(1,086)

(1,745)

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 term loan facilities approximate their fair value as these facilities bear interest at floating market interest
rates. The fair value of the term loan facilities is measured using Level 2 inputs. The fair value of the convertible debentures is
measured using Level 1 inputs. The fair value of the MRM Units, ML Units and the interest rate swap liabilities are measured
using Level 2 inputs. The fair value of the investment in NND LP (note 7) is measured using Level 3 inputs.

The following table presents the carrying amounts of each category of financial assets and liabilities as at December 31, 2022:

As at December 31, 2022

Financial assets:

Cash
Royalties and management
fees receivable
Amounts receivable

Interest rate swap assets
Investment in NND LP

Financial liabilities:

Accounts payable and
accrued liabilities
Bank loans, net of
deferred financing charges
Promissory note
Lease obligation
Convertible debentures
Exchangeable units and other

Fair value hierarchy

Level 1

Level 2

Level 3

Carrying value

FVTPL

Amortized
cost

7,409

-
-
3,309
42,339

5,575
16
-
-

45,648

13,000

5,376

-
-
-
-

-
-
3,309
-

3,309

-
-
-
-
3,716

-
-
-
42,339

42,339

-
-
-
-
-

147,905
3,467
770
47,637
-

-
-
-
47,637
-

-
-
-
-
3,716

3,716

$
29

205,155

47,637

3,716

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

For the years ended December 31, 2022 and 2021

19. Financial instruments (continued):

The following table presents the carrying amounts of each category of financial assets and liabilities as at December 31, 2021:

As at December 31, 2021

Financial assets:

Cash
Royalties and management
fees receivable
Amounts receivable

Interest rate swap assets
Investment in NND LP

Financial liabilities:

Accounts payable and
accrued liabilities
Bank loans, net of
deferred financing charges
Promissory note
Lease obligation
Convertible debentures
Interest rate swap liabilities
Exchangeable units and other

Carrying value

FVTPL

Amortized
cost

8,939

-
-
647
44,467

4,911
11
-
-

45,114

13,861

2,544

-
-
-
-
1,017
2,008

109,750
3,109
829
55,968
-
-

-
-
-
-

-
-
-
55,968
-
-

Fair value hierarchy

Level 1

Level 2

Level 3

-
-
647
-

647

-
-
-
-
1,017
2,008

-
-
-
44,467

44,467

-
-
-
-
-
-

3,025

172,200

55,968

3,025

The following table presents the changes in fair value measurements of the Company’s investment in NND LP recognized at
fair value at December 31, 2022 and 2021 and classified as Level 3:

Opening balance of Investment in NND LP
Distribution received
Unrealized fair value gain on Investment in NND LP

Years ended December 31,
2021

2022

44,467
(5,005)
2,877

43,627
(4,906)
5,746

Balance of Investment in NND LP, end of year

42,339

44,467

20. 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.

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

For the years ended December 31, 2022 and 2021

20. Financial risk management (continued):

(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, royalties and management fees receivable,
amounts receivable and investment in NND LP.

Credit risk on the Company’s cash are mitigated by holding these amounts with a Canadian chartered bank of high
creditworthiness. Credit risk on the royalties and management fees receivable and the investment in NND LP 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, 2022 and 2021 were as follows:

Cash
Royalties and management fees receivable
Amounts receivable
Investment in NND LP

2022

7,409 $
5,575
16
42,339

2021

8,939
4,911
11
44,467

$ 55,339 $

58,328

The aging of royalties and management fees receivable, as well as amounts receivable at December 31, 2022 and 2021
were as follows:

Within 30 days

(b) Liquidity risk:

2022

5,575 $

2021

4,911

$ 5,575 $

4,911

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. In
addition, the Company manages its liquidity risk by preparing rolling cash flow forecasts, taking into consideration various
scenarios and assumptions, monitoring the business operations of its royalty partners, and monitoring compliance with
the terms of financing arrangements.

As at December 31, 2022, the Company had a cash balance of $7.4 million (2021 - $8.9 million) and working capital of
$8.7 million (2021 - working capital deficit of $47.5 million). The 2021 working capital deficit includes the current portion of
the 2022 Debentures which were fully redeemed on December 20, 2022 (note 10).

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

For the years ended December 31, 2022 and 2021

20. Financial risk management (continued):

(b) Liquidity risk (continued):

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

Accounts payable and
accrued liabilities
Promissory note
Lease obligation
Long-term bank loans1
2027 Convertible debentures
Exchangeable ML LP units

Total contractual obligations
1)

Carrying
amount

Contractual
cash flow

2023

2024

2025

2026 Thereafter

$ 5,376 $ 5,376 $ 5,376 $ - $ - $ - $ -
3,467 4,952 - - - - 4,952
770 981 107 110 112 115 537
147,905 159,670 7,978 32,820 70,312 27,197 21,363
47,637 66,478 3,150 3,150 3,150 3,150 53,878
2,625 2,625 2,625 - - - -

$ 207,780 $ 240,082 $ 19,236 $ 36,080 $ 73,574 $ 30,462 $ 80,730

Includes the impact of interest rate swap agreements, including the swap agreement entered January 17, 2023, between Strat-B
LP and a Canadian chartered bank. Refer to subsequent events (note 24).

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

Currency risk is the risk that the fair value of future cash flows will fluctuate due to changes in foreign exchange rates.

DIV’s exposure to foreign currency risk as at December 31, 2022 is outlined in the table below:

Expressed in thousands of US dollars

Cash and cash equivalents

Foreign currency exposure to DIV

2022

182

2021

$ 182

$ 84

A 10% strengthening and weakening of the US dollar against the Canadian dollar would have increased and decreased
net income by a nominal amount as at December 31, 2022 and 2021.

Strat-B’s exposure to foreign currency risk as at December 31, 2022 is outlined in the table below:

Expressed in thousands of Canadian dollars

Accounts payable and accrued liabilities

Foreign currency exposure to Strat-B LP

2022

2021

345

$ 345

A 10% strengthening and weakening of the Canadian dollar against the US dollar would have increased and decreased
net income by a nominal amount as at December 31, 2022.

(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 has bank loans that are subject to floating interest rates. As at December 31, 2022, the interest rate related
to bank loans is mitigated by interest rate swap arrangements on $82.0 million of $149.2 million of the Company’s term
loan facilities (2021 - $72.6 million of $110.5 million of the Company’s term loan facilities). Refer to subsequent events
(note 24) for interest rate swaps related to the Strat-B LP term loan. Based on the balance outstanding on December 31,
2022, a one percentage point increase (decrease) in the interest rate would increase (decrease) interest expense by $0.4
million (2021 - $0.3 million).

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

For the years ended December 31, 2022 and 2021

20. Financial risk management (continued):

(d) Interest rate risk (continued):

The investment in NND LP is a financial asset measured at fair value, which will partially fluctuate due to changes in the
risk-free rate in addition to other factors including changes in the risk-premium and cash distributions received by the
Company from NND LP.

(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, Acquisition Facility, term loan facilities and
convertible debentures. 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, temporarily suspend the
DRIP, reduce the monthly dividend or reduce debt.

21. 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, 2022 and 2021:

Key management personnel

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

Maxam Services Agreement

Years ended December 31,
2021

2022

1,861 $
1,177

1,622
1,005

3,038 $

2,627

The Company’s President and CEO, Sean Morrison, and one of the Company’s directors, Johnny Ciampi, are co-founders
and managing partners of Maxam Capital Corp. (“Maxam”). The Company had a services agreement with Maxam (the “Maxam
Services Agreement”) whereby Maxam provided office space and administrative services to the Company. The Maxam
Services Agreement was terminated on May 31, 2021. In May 2021, DIV entered into a services agreement and cost sharing
agreement with Maxam Capital Management Ltd. (“MCM”), an entity in respect of which Mr. Morrison is a director, and Mr.
Morrison and Mr. Ciampi are minority shareholders, through which DIV provides certain office space and certain administrative
services to MCM (the “MCM Agreements”). The transactions under the Maxam Services Agreement and the MCM Agreements
are not material to DIV, Maxam, MCM, Mr. Morrison or Mr. Ciampi but are identified here for purposes of full disclosure.

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.

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

For the years ended December 31, 2022 and 2021

22. Supplemental cash flow information:

The following tables reconcile the movements in liabilities to cash flows arising from financing activities:

Promissory
note
(note 8(d))

Acquisition
Facility
(note 9(a))

Bank
loans
(note 9(b))

Convertible
debentures
(note 10)

Lease
obligations
(note 13)

Total

Balance, December 31, 2021

3,109

(118)

109,750

55,968

829

169,541

Changes from financing cash flows:
Proceeds from issuance of debt
Repayment of debt
Debt financing costs
Payment of lease obligation

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

Equity component of convertible debentures

-
-
-
-

-
358

Balance, December 31, 2022

3,467

-
-
177
-

(59)
-

82,720
(43,630)
(1,155)
-

220
-

52,500
(57,500)
(2,460)
-

869
1,334

(3,074)

-
-
-
(105)

-
46

135,220
(101,130)
(3,438)
(105)

1,030
1,738

(3,074)

147,905

47,637

770

199,783

Promissory
note
(note 8(d))

Acquisition
Facility
(note 9(a))

Bank
loans
(note 9(b))

Convertible
debentures
(note 10)

Lease
obligations
(note 13)

Balance, December 31, 2020

3,108

(247)

98,557

54,535

Changes from financing cash flows:
Proceeds from issuance of debt
Debt financing costs
Payment of lease obligation

Liability-related other changes:
New lease
Amortization of deferred financing charges
Accretion expense
Fair value adjustment on promissory note

-
-
-

-
-
144
(143)

-
-
-

-
129
-
-

11,400
(373)
-

-
166
-
-

-
-
-

-
535
898
-

-
-

743
-

Total

155,954

11,400
(373)
42

743
831
1,086
(143)

Balance, December 31, 2021

3,109

(118)

109,750

55,968

829

169,541

23. Segment reporting:

The Company has only one business segment that relates to the acquisition of royalties.

The following table summarizes the Company’s one business segment, separated by geographic region from which royalty
income is generated:

For the year ended December 31, 2022:

Royalty income
Management fees
Interest expenses on credit facilities

As at December 31, 2022:

Non-current assets
Total assets

Non-current liabilities
Total liabilities

Canada

United States

Total

43,611
533
8,708

1,040
-
203

361,664
376,240

197,511
203,857

81,273
82,210

20,188
20,705

44,650
533
8,911

442,937
458,450

217,700
224,562

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

For the years ended December 31, 2022 and 2021

24. Subsequent events:

(a) Strat-B LP enters into swap agreement:

On January 17, 2023, Strat-B LP entered into a swap agreement with a Canadian chartered bank for 75% of its US$15.0
million credit facility or US$11.25 million. The swap agreement has a fixed rate of 3.61% plus credit spread of 2.11% and
will mature on November 15, 2027.

(b) AM LP partial paydown of credit facility:

On March 2, 2023, AM LP made a $2.4 million partial principal paydown on its $17.4 million credit facility, reducing the
outstanding principal balance to $15.0 million.