Diversified Royalty Corp: Strategic Expansion and Strong Leadership Signal Sustained Value Creation

Diversified Royalty Corp (TSX: DIV) has emerged as a compelling investment opportunity in the royalty space, driven by its recent acquisition of Cheba Hut Franchising, Inc., coupled with strong shareholder approval of its leadership. The June 17, 2025, acquisition of Cheba Hut's trademarks and intellectual property marks a pivotal step in expanding its U.S. footprint, while the Corporation's annual general meeting on June 19 revealed robust support for its directors, with minimal votes withheld. Together, these developments underscore Diversified Royalty's ability to execute growth strategies while maintaining investor confidence—a recipe for sustained returns.

Cheba Hut Acquisition: A Strategic Leap into U.S. Franchising

Diversified Royalty's acquisition of Cheba Hut, a fast-casual sub sandwich chain with 77 locations across 19 U.S. states, represents its second U.S.-based royalty stream and its ninth overall. The $36 million transaction delivers an initial annual royalty of $4 million, growing at the higher of 3.5% or the U.S. Consumer Price Index (CPI) + 1.5% annually. This inflation-linked feature ensures the royalty stream's resilience in an era of rising prices, while Cheba Hut's 5% same-store sales growth in 2024 and projected $187 million in system sales by 2025 highlight its operational momentum.

The deal is accretive on multiple fronts:
- Revenue Diversification: The $4 million royalty adds ~7% to Diversified Royalty's pro-forma adjusted revenue, enhancing geographic and sector diversification.
- Tax Efficiency: The acquisition boosts tax pools by $51 million, bringing the total to $424 million, which can be depreciated to reduce cash taxes over time.
- Dividend Growth: The transaction enabled a 10% dividend hike, raising the annual payout to 27.5 cents per share (effective July 1, 2025). The pro-forma payout ratio of 83% net of the DRIP program signals financial prudence.

The Corporation's ability to fund the acquisition without equity dilution—via existing cash, amended credit facilities, and new debt—reflects its strong balance sheet and disciplined capital allocation. A would likely show a consistent trajectory, now bolstered by this latest accretive deal.

Shareholder Approval: A Vote of Confidence in Leadership

At its June 19 annual general meeting, Diversified Royalty's directors secured overwhelming support, with withheld votes averaging just 8.08% across the board. Notably, Sherry McNeil, CEO of parent company Cogeco, received only 0.52% withheld votes, signaling exceptional trust in her leadership. Even the lowest-supported director, Roger Chouinard, garnered 86% approval, a testament to the board's cohesion and strategic execution.

These results are critical because they validate Diversified Royalty's core thesis: acquiring predictable, growing royalty streams from proven franchisors. With a portfolio spanning brands like Mr. Lube + Tires, AIR MILES®, and now Cheba Hut, the Corporation has established itself as a consolidator in a fragmented royalty market. Shareholder approval of leadership ensures continuity in executing this strategy, reducing risks tied to governance uncertainty.

Why This Matters for Investors

Diversified Royalty's moves create a compelling value proposition for income-oriented investors:
1. Dividend Safety and Growth: The 10% dividend increase follows years of steady payouts, supported by a portfolio of inflation-linked royalties. The 83% payout ratio net of DRIP leaves room for further hikes as Cheba Hut's royalties grow.
2. Debt Management Discipline: Despite leveraging debt facilities to fund the acquisition, the Corporation plans to repay its $18 million draw on the Acquisition Facility within 12 months, maintaining a conservative leverage profile.
3. Strategic Scalability: Cheba Hut's franchised model (97% franchised locations) aligns with Diversified Royalty's preference for low-operational-risk partnerships. The 50-year licensing agreement provides long-term visibility, while incremental royalty increases (subject to coverage tests) offer upside.

A could illustrate its resilience amid macroeconomic headwinds, positioning it as a defensive play with growth characteristics.

Risks and Considerations

While the acquisition and shareholder support are positive, investors should monitor:
- Franchisor Performance: Cheba Hut's ability to meet sales growth targets directly impacts royalty payments.
- Interest Rate Sensitivity: Rising rates could pressure debt costs, though floating-rate facilities (e.g., SOFR-based loans) are hedged at 75% for the Cheeb Credit Facility.
- Regulatory Risks: Trademark disputes or franchise model challenges could disrupt cash flows.

Investment Takeaway

Diversified Royalty Corp's Cheba Hut acquisition and robust shareholder approval of leadership highlight its dual strengths: strategic execution and governance stability. With accretive growth, a rising dividend, and a balance sheet capable of scaling without dilution, the Corporation is well-positioned to deliver stable income and capital appreciation. For income investors seeking exposure to the franchising sector, Diversified Royalty offers an attractive entry point, particularly at its current yield (~6.5% based on July's dividend). Monitor the stock for further upside as Cheba Hut's results materialize and the Corporation pursues additional U.S. opportunities.

In a market seeking reliable income and growth, Diversified Royalty's blend of strategic moves and investor confidence makes it a compelling choice for long-term portfolios.