Diversified Royalty Corp. (DIV) Earnings Call Transcript & Summary

Hello, and welcome to the Annual General Meeting of Stockholders of Diversified Royalty Corp. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to the Chairman of the Board of Directors, Paula Rogers. The floor is yours.

Thank you. Ladies and gentlemen, the Annual General Meeting of Diversified Royalty Corp. will now come to order. My name is Paul Rogers, and I am Chair of the Board of Directors of the corporation. I will act as Chair of the meeting. Before beginning the meeting, I would like to comment on the procedure we have adopted to hold this meeting. This meeting is being held virtually in light of the COVID-19 pandemic and the need for all of us to physically distance. As this meeting is being held virtually via live audio cast, we would like to advise you of certain rules and procedures we have adopted to allow for the orderly conduct of the meeting. One, only those registered shareholders that have logged into the meeting using their 15 digit control number and those duly appointed proxy holders that have logged into the meeting using a username and password obtained from Computershare will be permitted to ask questions. Persons who have logged into the meeting as guests will not be permitted to ask questions. Questions in respect of a motion can be submitted by any such registered shareholder or any such duly appointed shareholder -- appointed proxy holder using the instant messaging service of the virtual interface. Two, when asking a question, please indicate your name, which entity you represent, if any, and confirm that you are a registered shareholder or a duly appointed proxy holder. Three, questions will only be addressed during the question period at the end of the meeting, following the President and CEO's report on DIV's business, provided that questions regarding procedural matters, or directly related to the motions before the meeting may be addressed during the meeting, if necessary. We will now proceed with the formal portion of today's meeting. I will ask Mr. Greg Gutmanis to act as secretary for this meeting. With the consent of the meeting, I appoint Computershare Investor Services, Inc. through its representatives as scrutineers to compute the votes of any ballots taken at this meeting and to report thereon to the chair and secretary following the conclusion of the meeting. The secretary is in possession of a report confirming that the notice calling this Annual General Meeting was mailed to shareholders in accordance with the articles by which the corporation is governed and applicable law. With the consent of the meeting, the reading of the notice of the meeting will be discussed with, and I will ask the secretary to append the confirmation of mailing to the minutes of this meeting as a schedule. Will the scrutineer please submit the preliminary report on attendance to the secretary? The secretary will now read the scrutineer's preliminary report.

The scrutineer's preliminary report reads as follows. There are at least 3 shareholders and/or proxy holders present at this meeting, representing in person or by proxy 35,985,365 shares being 29.56% of the total 121,746,772 outstanding shares of Diversified Royalty Corp.

I adopt the scrutineer's preliminary report and declare accordingly that a quorum is present. The final scrutineer's report on attendance will be appended to the minutes of meeting as a schedule. As there is a quorum present and as adequate notice of this meeting has been given, I now declare this annual general meeting to be regularly called and properly constituted for the transaction of business. Before continuing with the formal part of the meeting, I would like to take a moment to thank all shareholders who have joined us via today's audio webcast, we regret that you cannot join us in person due to the ongoing implications of COVID-19. We will first deal with the formal business to fulfill legal requirements of this meeting, following which our President and CEO will provide an update on the corporation's activities over the past year and answer any questions you may have. For the purposes of the meeting today, voting on all resolutions will be conducted by electronic ballot. Only registered shareholders that have logged into the meeting using their 15-digit control number and those duly appointed proxy holders that have logged into the meeting using a username and password obtained from Computershare will be permitted to vote on the ballots. Such registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of all business items. Persons who have logged into the meeting as guest will not be permitted to vote on the ballot called for. However, registered and beneficial shareholders that have submitted their valid proxies or voting instructions in advance of the meeting in accordance with appropriate time lines will have their shares voted in accordance with such validly submitted proxies and voting instructions. When you are asked to vote, you will receive a message on the virtual interface requesting you to register your vote. When the ballots are open, we will pause for approximately 2 minutes to allow you to vote, following which the ballots will be closed and no further voting will occur. As the first item of business, I now present to the meeting the financial statements of the corporation for the year ended December 31, 2020, and the report of the auditors thereon. Copies of the financial statements were mailed to shareholders who requested such documents prior to the meeting. If there are any questions, which any shareholder would like to ask in respect to the financial statements and the report I would be glad to answer them or call on others to do so during the question period at the end of the meeting. The next item of business before the meeting is the nomination and election of directors. The number of directors on the Board of Directors was previously fixed at 6, and the Board intends to fix this number at 4 for the time being. The Board is, however, currently undergoing a search to identify a suitable candidate with a mix of skills and experience that would complement those of the existing directors to be added as the fifth independent director in due course. We have received no nominations for election as a director for the ensuing year from outside parties in accordance with the advanced notice provisions of the corporation's articles or the business corporations at the British Columbia. I now ask the secretary to read the names of the persons nominated as directors as listed in the corporation's information circular dated May 19, 2021.

The name of the persons nominated as directors of the corporation for the ensuing year are: Paula Rogers, Johnny Ciampi, Garry Herdler, Lorraine McLachian. I confirm that the corporation has also received the written consent of each of these nominees to act as a director of the corporation.

Since the number of nominees is the same as the number of vacancies to be filled, I now ask for someone to move a resolution that the persons nominated for election as directors be elected as directors of the corporation to hold office until the next annual meeting. Who will move the motion?

So moved.

Who will second the motion?

I second the motion.

Is there any discussion on this motion? As noted earlier, voting on this and all other resolutions will be conducted by electronic ballot after the presentation of all business items. Unless there are any questions, I will move to the next item of business. The next item of business before the meeting relates to the appointment of auditors of the corporation. The Board of Directors of the corporation has approved, subject to shareholder confirmation, the appointment of KPMG LLP as the auditors of the corporation. I will now ask for someone to move a resolution that KPMG LLP be appointed as auditors of the corporation for the ensuing year and that the directors be authorized to fix of remuneration to be paid to the auditors. Who will move the motion?

So moved.

Who will second the motion?

I second the motion.

Is there any discussion on this motion? As this is the last business item to be presented at the meeting, we will now proceed with the voting on all business items. The ballots are now open. And at this point, all registered shareholders and proxy holders who have logged into the meeting using their 15-digit control number and those duly appointed proxy holders that have logged into the meeting using a username and password obtained from Computershare and wish to vote will be able to see on the screen, all motions being brought forth at this meeting. Please register your votes by accessing the voting page and selecting the for or withhold button next to the name of each proposed director and next to the resolution with respect to the appointment of KPMG LLP as the corporation's auditors. We will provide registered shareholders and duly appointed proxy holders approximately 2 minutes to complete the electronic ballot. Once the electronic balloting closes, the voting page will disappear, and your votes will automatically be submitted. [Voting]

The ballots are now closed. And I would ask that the scrutineer compiles a report regarding the results of voting on all business matters. The results of the ballots compiled by the scrutineer will be appended to the meeting -- to the minutes of this meeting and will form the official record as to whether the resolutions move with respect to each business matter put forth for consideration at this meeting has been carried or failed to pass. The corporation will announce the results of the ballots by news release following receipt of the final scrutineer's report, which results will also be filed under the corporation's profile on SEDAR. The formal items of business as set out in the notice of meeting have now been dealt with. Accordingly, I call for a motion to conclude the formal portion of the meeting. Who will move the motion?

So moved.

Who will second the motion?

I second the motion.

Is there any discussion on this motion? As there is no further business to come before the meeting, I declare the formal part of the meeting to be concluded. I would now ask Sean Morrison, President and Chief Executive Officer of the Corporation, to say a few words about the past year and give an overview of recent events.

Awesome. Thanks, Paula. 2020 was a roller coaster year indeed. In February 2020, DIV announced the $44 million acquisition of the trademarks of Oxford Learning, one of Canada's leading tutoring businesses with over 150 locations in a 35-year track record, a perfect fit for Diversified business model. At the time of the purchase, we expected Oxford to be one of the strongest royalties in our portfolio, and had just completed a very strong 2019 and generated 10% same-store sales in January 2020. The Oxford Learning transaction was DIV's third royalty acquisition in 11 months. DIV increased its dividend for the second time in 3 months to $0.235 per share, and our pro forma payout ratio was slightly under 100%. Shortly after the Oxford Learning announcement, DIV entered into a $34.6 million bought deal of common shares at a price of $3.20 per share with a syndicate including Cormark and CIBC. In mid-March, the world changed and had an immediate impact on DIVs royalty partners. 100% of Mr. Mikes restaurants were temporarily closed. Open houses in the residential real estate market effectively stopped for Sutton Realty. Students were no longer allowed to go for tutoring in person at Oxford Learning centers. AIR MILES' customers spending was negatively impacted with people staying at homes miles driven reduced negatively, affecting Mr. Lube's business and Nurse Next Door. The question was were caregivers going to be able to continue seeing their customers in person? DIV's management team began working with our royalty partners to better understand the impact of COVID on their businesses. We provided the Board with a weekly update. DIV management focused on the most impacted business and approached them with royalty release. The objective was to balance the interest of DIV's shareholders with the growing concern to support these businesses needed since Mr. Mikes' restaurants were all closed and provided Mr. Mikes with the full royalty waiver. We also provided Sutton Realty with royalty relief to bridge the immediate impact on their business. Our approach to the dividend was to take a medium-term perspective versus a short-term perspective. DIV reduced its annual dividend from $0.235 per share to $0.20 per share, a decrease of 15% and only a 10% decrease from the annual dividend prior to the Nurse Next Door acquisition in November 2019. They've had some excess cash on its balance sheet and was prepared to have 100-plus percent payout ratio as we worked our way through COVID. DIV's royalty partners have recovered sufficiently so that DIV s payout ratio was below 100 by the end of Q3. In October, DIV approached Mr. Lube, by far, our largest and highest-quality royalty partner within a proposal to roll in 13 new stores and do an incremental royalty transaction, at a multiple higher than the agreed-upon formula with DIV trading at $1.80 per share, but much lower than DIV's typical incremental royalty acquisition multiple, a win-win proposal. Mr. Lube accepted the proposal. The impact on debt was an increase in distributable cash per share of approximately $0.01. In summary, 2020 started off with the bang, a third royalty acquisition in 11 months, the second dividend increase in 3 months and $34.6 million bought deal at $3.20 per share. COVID impacted the entire world. DIV supported its royalty partners and reduced its annual dividend by only 15%. By the end of the year, DIV's payout ratio pro forma was in the low 90s, and DIV's share price started its recovery. What's next? DIV believes its royalty partners are well positioned to rebound from COVID and therefore, DIV is well positioned to see a corresponding increase in the distributable cash per share and its ability to increase its dividend in the short- to medium term. With respect to deal flow pipeline, DIV has seen an increase in the number of opportunities it is looking at and is optimistic that the royalty acquisition momentum before COVID will return. In summary, overall, we believe, while COVID-REIT havoc on the economy and our royalty partners have proved that its business model is resilient, the continued interest from high-quality potential royalty partners gives us confidence we can continue to grow the business and create long-term shareholder value. And finally, I'd like to thank our royalty partners for successfully managing through a once-in-a-lifetime pandemic; DIV's board for their support through a roller coaster year, specifically our new Chairperson, Paula Rogers; as well as Greg and Abigail for all their hard work. That's the update for 2020.

Thanks, Sean. I would now like to open the meeting to questions from registered shareholders that have logged into the meeting using their 15-digit control number and those duly appointed proxy holders that have logged into the meeting using a username and password obtained from Computershare. I ask that such shareholders and duly appointed proxy holders who would like to ask a question use the instant messaging feature of the virtual interface to do so. Persons who have logged into the meeting as guests will not be permitted to ask questions. We will answer as many questions as time reasonably permits. When asking your question, please state your name, the entity you represent, if any, and if you are a proxy holder, please indicate the shareholder which you represent. Please limit your questions to topics relating to today's subject matter and present them in a concise manner. We will now give you a moment to type in your questions. For each question we answer, we will summarize the question and read out loud, the name of the person who ask such questions, and if applicable, the entity such person represents. We would like to remind you that questions that were already answered or that are redundant or repetitive will not be answered. Well, there are no questions. So that concludes the agenda for the meeting. I'd like to thank everybody for your attendance. Thank you.

This concludes the meeting. You may now disconnect.