Diversified Royalty Stock

Good morning, ladies and gentlemen, and welcome to the Diversified Royalty Corp. Investor Conference Call. [Operator Instructions] This call is being recorded on Friday, May 15, 2026.

I would now like to turn the conference over to Sean Morrison, CEO of Diversified Royalty Corp. Mr. Morrison, please go ahead.

Thank you for that introduction. And I just want to thank everybody for taking the time to hop on this call to get a better understanding of the transaction we announced after market yesterday. We got a short presentation. We'll take you through. We've got Pamela, the CEO of Mr. Lube and Tires here. Brian Allen, CFO of Mr. Lube and Tires; Greg Gutmanis, CFO of Diversified; and myself, Sean Morrison, CEO of Diversified Royalty Corp. We couldn't be more excited to announce the acquisition of Mr. Lube and Tires franchisor business. I've been in the franchise and multi-location business space for over 30 years. As an investment banker, my first client was A&W Food Services in the mid-90s. In the late '90s, I help David Aisenstat buy The Keg restaurant chain and in the early 2000s, I advised Lululemon and Aritzia.

When I started, DIV in 2013, my first call was to the owners of Mr. Lube. In 2015, DIV completed a royalty transaction with Mr. Lube, which really launched the business. It has been a superior royalty partnership for the last 10 years. 3.5 years ago, things changed. Pamela took over as CEO of Mr. Lube and Tires with a different mindset for the business, to leverage on its strong historical track record, proven business model and its great group of franchisees to supercharge its growth. And that's exactly what's happened, world-class performance and superior economic results for all parties.

For the last 3 years, DIV has been trying to buy Mr. Lube and Tires. It's been an excellent royalty partner, but the prospects for the business are so spectacular owning the business is much better. I've been attending Mr. Lube's annual franchise convention for the last 10 years. The strength of this business is, firstly, and most importantly, the strength of the franchisee network. With Pamela and her team's focus and their execution, the franchisees that is, the profitability of the average store has almost doubled in the last 3.5 years. The franchisees are running superior businesses, and they are hungry for continued growth.

I've worked with many of Canada's leading franchise and multi-location businesses over the past 30 years, Mr. Lube and Tires is the best franchise business I've ever seen. This is a gamechanger transaction for Diversified, and we couldn't be more excited. We've got a presentation we'll take you through. We go on to the first slide, the strategic acquisition of Mr. Lube and Tires franchisor business.

DIV has agreed to acquire the franchisor business of Mr. Lube and Tires for $235 million. It's a strategic transaction. DIV has been -- sorry, Mr. Lube and Tires has been DIV's largest and best performing royalty partner for 10-plus years. DIV has been seeking ways of increasing its economic exposure to Mr. Lube and Tires for many years. DIV has benefited from Mr. Lube and Tires's strong same-store sales growth, which has averaged 7.25% over the past 10 years. This transaction will provide DIV with continued exposure to Mr. Lube and Tires growth, not just same-store sales growth, but through adjusted EBITDA growth, which has grown at 14.7% CAGR over the past 10 years.

DIV has been a steady growth, high dividend business for 10-plus years. DIV believes this transaction accelerates its growth. In terms of the details, the incremental EBITDA, the DIV and its subsidiaries have received $34.1 million of royalties and management fees from Mr. Lube and Tires in 2025. DIV estimates that the combined Mr. Lube and Tires business will generate approximately $58 million of adjusted EBITDA in the 12 months following closing.

In terms of the debt we're using to finance this transaction, we put together a syndicate of banks that have been highly supportive of Diversified Royalty Corp. and Mr. Lube for many years. We are capitalizing this business with $212 million of senior debt with only $127 million of that being incremental debt. Our rolled equity, management of Mr. Lube and Tires will roll $20.6 million of equity into a 4% retained interest in the combined business and nonmanagement equity holders of Mr. Lube and Tires will roll $13.7 million into approximately $3 million shares -- 3.4 million DIV shares via private placement at $3.98 per share.

The remainder of the purchase price and transaction expenses will be funded with $34 million of cash on hand and a small draw on our unused acquisition facility of $40 million. This transaction is accretive. DIV's distributable cash per share is estimated to increase from $0.3128 per share to $0.3478 per share, 11% increase. DIV will keep its current annual dividend at $0.285 per share and focus on debt reduction in the short term. The second -- the next 7 slides of the presentation, we'll have Pamela Lee, the CEO of Mr. Lube and Tires, walk you through that part of the presentation.

Thank you so much, Sean, and good morning, everyone. First of all, I just want to say thank you, Sean and Greg for inviting Brian and I are here today to talk about Mr. Lube and share more information about it. I have to say we're very happy with the outcome of this transaction. When you think about when we set out to do this, there were 3 things that really were important to me, and that was making sure that we put the brand in the best position, we took care of our franchisees and our employees. And I think we've checked checked, checked all of those 3 boxes. So I'm very excited about that. And to work with DIV on a go-forward basis in this capacity is very exciting. You guys really understand our brand, and that's really important and the magic behind it, which is our franchise system. So thank you for that.

So I'm on the page that says Canada's leading automotive franchisor quick services, and we're very proud of that. We have 187 locations across Canada right now. And in fact, 2 more stores are opening today. So that the number will be 189 by the end of today. There are 3 things that we really focus on as a business, and that's building our brand, the first part, and that's really right now, 86% of Canadians know our brand, and we continue to grow that. The other part is delivering exceptional customer service. When we look at what really is our secret sauce, and that's making sure our Canadian customers are taking care of every time they visit us, we look at many metrics being Google Net Promoter Score and [ a whole ] of others. But those are really things that we look to measure and continue to track our progress with our customer experience.

And then the last one [indiscernible] is our strength is really in our franchise system, and we want to make sure our franchisees are taking care of that they are seeing profitability at their stores and continue to want to grow with us. And so we do a number of things to make sure that, that bottom line is strong for them. 79% of our stores are operated with franchisees with greater than 10 years of experience, and we're very proud of that, too. Over to the next page. All those 3 things, building our brand, delivering exceptional customer service and building our franchisee profitability is paying off. And it helps us build a scalable organization that helps us grow.

So right now, we're market-leading in quick lube brand. We're a very well-recognized brand, continue to grow in a number of locations. We have an exceptional management team, and that really speaks to the bench strength needed to deliver more and more. And so we've been recognized through a number of different awards, best managed companies, Canada's most admired corporate cultures. But really, when you think about it, the organization has an average tenure of over 10 years. Our management team is over 15 years. There's a lot of institutional knowledge in the management team, and we work very, very well together. We have highly attractive store unit economics. That's our proven playbook. Average store sales of $3.1 million per store outperforms industry average. And again, we continue to grow that.

Best-in-class operators and locations. We have very experienced operators with a long runway for growth, 79% of stores operated by franchisees with over 10 years of experience. Many of them are moving to second generation as well, and we have long lease terms of almost 15 years. And then we have a robust growth profile. And ultimately, that's what it comes down to. We have a business model that works and it resonates with our customers. When I think back about -- I've been with the company for 20 years, we are now at a place where we have unprecedented demand for new stores, both inside and outside the company with our existing franchisees and with new people who want to enter the system. So that also speaks to the strength of what we're building here.

I'm just going to go to the next slide now, and that's our background and history. Over the last 50 years, so we are celebrating 50 years this year, and we have achieved many, many milestones. But all of that throughout is really rooted in and speaks to our culture of innovation and collaboration. We were originally founded in Edmonton, Alberta by Cliff Giese, who opened the first quick lube in Canada and started that industry. Over time, we expanded services. And when others were focusing on quick lubes, we started to expand into other maintenance services, grow our revenue and bring convenience to more consumers across Canada. And then we started to get into the tire space.

Legislation is leading towards mandating tire exchanges and swaps from winter and summers. Insurance rates are really helping to boost that. And from a safety perspective, provinces are requiring and mandating it. And so that has boded well for the industry and helped it grow. And for us to do it in a convenient way where no appointment is necessary has been innovative for the industry, and no one else is doing it nationally the way we do. So we're very excited about that, and we see a continued long runway for growth in that area. And we will continue to expand as well. It's helped us get into new markets. It's helped us get into new concepts and expand the number of bays that we currently own and operate. All that to say is that by 2026, now, we're still continuing to look at ways to expand our franchise performance and take over as market leaders and with market dominance in mind.

Okay. So I'm going to go to core strategies and pillars. That's the next slide. You'll see on the bottom, the brand, customer experience, franchisee profitability. That's what I just talked about. It's really our key pillars of success. It's who we are, what we live and breathe for every day. The above yellow area is really our strategy for gaining market share. And I look at the bottom one first, master the core. That's about making sure foundationally, our stores are optimizing their performance every single day, and we invest heavily in training to make sure that, that exists. We've hired operations managers. We do mystery shops. We visit our stores, we do audits, all of those good things, and we continuously track performance, working with our franchisees to do that.

The second area that we build on is accelerating growth with technology. And there are really 3 areas within that. One is unlocking data. And so we've built in business intelligence at all levels to make sure our franchisees have line of sight to their performance, and that we can use that to help make sure that anything that's underoptimized is being identified early. The second area is we integrate tools now with technology. So a lot of vehicle technology is changing. Diagnostics is playing a bigger role and having that integrated into our systems is key. It allows us to reach customers predictably and allows us to also be able to see opportunities much faster. And the second thing, which I'm really excited -- most excited about is it prepares us for a future that is basically cloud-based, also application-based. So AI is going to be a big part of every retailer and making sure that we are prepared for doing -- to receive that is what we're building into our systems today.

And then third is building the brand, and that comes in 2 forms. One is making sure all our consumers understand Mr. Lube is in the -- Mr. Lube + Tires is in the tire business, and we're growing and expanding into new markets. And the other area is increasing points of presence. And so we've got, again, as I mentioned, unprecedented demand for new stores. And so that is feeding well into our expansion plans.

Moving over to the next slide, strong franchise network and store footprint. Ultimately, that is where it comes down to. When we take care of our franchisees, everything else falls in line, and that is always going to be our focus. So franchisees are experienced. Again, as I mentioned, over 10 years of experience for the majority of our stores. We have 1/3 of our system operated by second-generation franchisees and that are highly engaged. We require our franchisees to live and work in their communities. And so that has been very important to have that engagement and that readiness to react whenever needed. We are very proud of our strategic councils that involve our franchisees. We have it at many different levels, strategically, operationally, marketing-wise. And so -- and even on a technology standpoint, we bring in franchisees to make sure our decisions are collaborative, innovative, but also that it will be able to drive through throughout the entire system.

Our franchisees are heavily invested. 92% are owned by multiunit operators. Again, that wasn't necessarily the case 5 years ago or even 3 years ago. But since with our renewed focus, a lot of franchisees have put up their hands for more stores and have -- their portfolio of stores have expanded greatly in the last few years, and we continue to get that strong demand for more. And then store locations. So in the past, our store location average was about 5 stores a year. We are now looking at double digits. This year, it's 18. Last year, it was 16, and we continue to look at double-digit growth. We're in a really interesting time right now. The industry is fragmented.

There's a lot of consolidation going on. And those really present opportunities for Mr. Lube + Tires to expand when others are not looking to do so. And so it's helped us drive our store count up as we look at expanding our services as well. It's a good time for us, and we continue to see growth in that area. Over -- you might notice on the right, there's just a picture of the Mr. Lube + Tires. So we went through a nationwide rebrand last year, and we're really proud of that. We had 185 locations rebranded essentially within a short amount of time. If you actually think about it like with permitting and across the board with different franchisees, having it done in a short amount of time was really a testament to the collaboration of our -- and the closeness of our system.

Many of you who have renovated a house will find it hard to even renovate a full house -- one house in 1 year. And so to be able to do 180 stores is amazing in 1 year. And so I really appreciate all the work with the franchisees to help us do that. So it takes us to the near-term levers for continued growth, and that's where we've become really laser-focused on our strategy to continue pushing through every year as we grow. And that's where we come back to our key strategic pillars, master the core technology and building the brand. And so store growth really talks about how we have looked at building the brand. We've expanded our view of how expansion occurs.

Previously, it was with greenfield flagship sites, which take longer, more expensive, but they tend to be in very urban markets. But we've also seen opportunities to stretch into some of these mid-markets where cities are starting to boom, where there's an opportunity to be a one-stop shop for tires and automotive services, mechanical work, which is also an area we're getting into. So this has presented a new opportunity, a new growth engine for us, and we continue to see that expand. Investment in technology, that's what I talked about before with data, integrated tools and positioning us for our future. We are already trialing some new things with our franchisees that's leading edge, and we're excited to see that roll out. And our store and rebrand design, we've already heard from customers who have said that the rebrand has helped them gain awareness around the tire service offer.

Our franchisees are really appreciating the bright lights that gain visibility in our markets. And so it's been very good to help modernize the brand and allow consumers to see us as an evolving and innovative retailer. And finally, our core product expansion. We continue to focus on tires. But an area that isn't mentioned here that we are also really focusing on is expanding on fleet. the vehicle car park is changing and car sharing, for example, is becoming very common. And so making sure that our fleet companies see Mr. Lube + Tires as the only place to go will help us expand our consumer base and being a national provider to doing that helps us deal with a lot of national providers as well, national fleet customers.

And then I love the box at the very right, which is M&A opportunities, which is an area that we see really a lot more growth potential. Okay. So then it takes us to our experienced leadership driving growth. All those boxes, when you add them all together, it adds up to about 123 years of experience. I carry 20 years experience, 20 years in automotive with Mr. Lube + Tires and previously in the tech world. Bob Anderson is 40 years, our longest-standing employee started as a technician in Saskatoon, knows and breathes and lives Mr. Lube + Tires, obviously, after 40 years in charge of training and development.

David Waterfall, 15 years franchising background, was instrumental in launching Mr. Lube + Tires as a brand. His philosophy is always on marketing. So he is always making sure that there's a message going out to our consumers. Brian Allen went 20 years at Mr. Lube. He's everything around numbers, lives and breathes franchise profitability, just as a Board member of the Automotive Industry Association. Craig Blair, 10 years, massive landlord relationships, Chief negotiator in that area, retail background and in charge of building out our flagship and conversion strategy.

Mike Whitmell is 17 years with Mr. Lube, he's a transformational change agent and basically led the entire movement of Mr. Lube on the innovation front with technology. And then Dixie Ho is 1 year, joined us recently with a franchise retail background, the perfect combination, and she assisted a Board member of the CFA, the Canadian Franchise Association.

That is what I could do in a short amount of time, but yes, I could go on for days. So kept it short.

Okay. Appreciate that, Pamela. And I think just the last point on this slide is the experienced leadership team that's driving this awesome growth and we will continue to drive the awesome growth of Mr. Lube + Tires everybody on that page is a shareholder of the business going forward. They've rolled $20-plus million of equity into this transaction. So they've produced superior results, but they're also going to be partners in the business moving forward, which I think is incredibly important.

Thanks, Sean and Pamela. So the next slide is the sources and uses of this transaction. As we mentioned at the start of the presentation, we're raising $212 million of new senior debt. You can see below there's an existing $85 million of which we're paying off. So it's approximately $127 million of incremental term debt from a supportive and strong syndicate of banks that we've worked with for some time.

In addition, there's a private placement from the passive shareholders rolling their equity, $13.7 million of DIV shares. As Sean just mentioned, the management team that was outlined on the previous slide, which we're exceptionally excited to work with going forward, $20.6 million of rolled equity. And then DIV is injecting approximately $75 million in the subsidiary, a combination of $34 million of cash on hand that we had left over from our convertible debenture that we raised in February and a $41 million draw on DIV's acquisition facility.

Below that, you'll see the uses. As I mentioned at the top, repaying the existing debt in our royalty subsidiary of $85 million. The purchase price for Mr. Lube is $235 million and some estimated transaction costs. So the next slide is the estimated pro forma combined contribution. So we've had this slide in previous summaries where Mr. Lube had historically as a royalty been just shy of half, so 45% of our business in 2025. The contribution of Mr. Lube going forward pro forma is expected to now be 56%. The other 8 royalty partners comprising essentially the second segment of our business going forward, which is 8 royalty partners making up the balance.

So this slide, the impact on DIV from a financial perspective, the first column on the left is our current run rate. So our adjusted revenue of $80 million of this transaction now exceeds $100 million in pro forma. The normalized EBITDA, $75.4 million pro forma for the transaction, just over $99 million. Distributable cash at $53.4 million going to $60.5 million pro forma. And importantly, as Sean mentioned at the start of this presentation, distributable cash per share, $0.3128 per share going to $0.3478.

So that's just over an 11% accretion on a per share basis and compares to our dividend of $0.285 annualized. We are not changing the dividend policy. And as a result, the incremental cash flow can help with deleverage in the short term and our payout ratio goes down commensurately.

I'll pass it back to Sean for the summary slide.

Okay. I appreciate you guys walking through the presentation, I think more of the same. While DIV will remain focused on being the leading provider of royalty financing to North American franchisors, the opportunity to acquire Mr. Lube and Tires was just too awesome. And we think the acquisition of this business will help meaningfully grow our distributable cash per share, which is creating value for shareholders moving forward.

As we've learned from this presentation, Mr. Lube and Tires is the clear market leader in Canada's quick lube oil change market with an average franchisee generating market-leading economic returns. This business has generated positive same-store sales growth in 21 of 23 years. Again, just an awesome economic performance. Modernize the store base, as Pamela said, all the stores pretty much have been upgraded with great signage, exemplifying and magnifying the fact that it's not just Mr. Lube, it's Mr. Lube + Tires, which is a huge part of the business that keeps growing.

Growth opportunities, opening new stores, expanding service offerings and looking at acquisition opportunities. And I think with the franchisees being the most important, I think the experienced and motivated management team is just as important. They've been driving spectacular growth of this business for the last 3.5 years, and they're excited and we're excited with what the prospects of the business look like going forward.

There's a huge pipeline of new stores coming into the system and the operating leverage for our franchisor business with new store growth with franchisees making great money is an awesome economic machine. The funding -- the remaining proceeds of the $69 million of convertible debentures, combined with cash on hand, is helping us fund this transaction, puts DIV in a unique situation where we don't need to raise equity to fund this transaction. We have a very supportive syndicate of banks. There's been rolled equity, a meaningful chunk of rolled equity from the management team and the existing shareholders of Mr. Lube.

So we're here to just let you guys know that we're very excited about this transaction and the prospects for DIV moving forward. We think like Pamela was supercharging -- started to supercharge Mr. Lube and Tires 3.5 years ago, we think this transaction will help supercharge DIV's prospects moving forward. So I appreciate everybody again for taking the time to listen to this presentation.

If we could open it up for some questions, we'll take a few, and we'll go from there.

[Operator Instructions] Your first question comes from the line of Matthew Lee from Canaccord Genuity.

Congrats on this deal. Maybe you can provide some color into how they're thinking about. You've always had a very long relationship with the team. But why was now the right time to make an acquisition both from your perspective and from theirs?

Yes. Good question. I mean, just like every business, there's a succession and transition plan that eventually occurs. Lots of people and especially owners of great businesses like to own those businesses for a long period of time, and we respect that. Cliff Giese was one of the shareholders. He founded Mr. Lube and Tires 50 years ago. So you can imagine he's at an age where estate planning and other types of motivations are at play. Just like the rest of the shareholders, there comes a time when it makes sense for them to look for a transition or succession.

And like I said, Mr. Lube and Tires has been supercharged with its growth with Pamela and Brian and the team elevating their status within the company to focus on supercharged results. And like I said, I've been working with franchisor businesses for the last 30-plus years. This is the best one I've ever seen. And so for that reason, for the last 3.5-plus years, I have been keen to increase DIV's exposure to Mr. Lube and Tires. And obviously, an acquisition of the businesses was the best case scenario for us and provided the shareholders of Mr. Lube and Tires a nice transition at a fair price. Franchisees are in the best possible position. It's the same partners, the same management team, the same interest, full alignment. So it's been just a seamless and perfect transaction for franchisees, management, diversified and selling shareholders.

Got it. That's helpful. And then I think in 1 of your slides, maybe to Pamela, you mentioned there's some M&A opportunities. Can you just talk a little bit about what you kind of buy that would augment the Mr. Lube business?

Yes. So in terms of the M&A opportunities, as you can imagine, there are small clusters of like 5 to 10 quick lube service kind of more privately branded private label type businesses that have been around a long period of time. And Mr. Lube and Tires is an awesome potential acquisition partner for these owners of these businesses to get a reasonable liquidity event and for Mr. Lube and Tires to come in and kind of rebrand those businesses, refurbish them and then sell them and partner them with their existing franchise network. So that's been part of their growth and has been something that Pamela and her team have been focused on for the last 3.5 years.

And kind of like us, buying Mr. Lube and Tires, these types of transactions take some time. They're building relationships. They're letting the owners of these small businesses know that when the time is right for them, Mr. Lube and Tires is ready to work with them to come up with a transaction that makes sense for all parties and helps ultimately get them the liquidity they're looking for, but get the growth and our franchise network partners more opportunities.

So there's lots of those out there, as you can imagine, and that has been the focus of management and will continue to be the focus. And just sometimes it just takes time to get the right deals for the right times, but that's part of the plan moving forward for sure.

Your next question comes from the line of Ty Collin from CIBC.

Good morning, everyone. Thanks for all the detail. Pamela, great to hear from you as well this morning. Maybe my first question, obviously, this is a pretty meaningful change in the makeup of DIV's business. Traditional royalties are now less than half of pro forma EBITDA. So just how are you thinking about the portfolio moving forward? Like is the primary focus still going to be on traditional franchise royalties? Or does this kind of open the door to considering a wider spectrum of deals and structures and maybe even executing a similar type of transaction with your existing royalties?

Yes. I think, honestly, I mean, there's going to be lots of opportunities coming at us as there have been over the last 12 years. This is a unique situation. We're primarily focused on being a royalty partner for the owners of great franchisor businesses. We've done the dance with Mr. Lube for 11 years. It was, like I said, the right time for their shoulders looking for a liquidity event and a transition. And it's just been such an awesome experience. And like I said, the business has gapped up in the last 3.5 years, primarily because of management and the franchisees just executing on a different level.

So this is not an opportunity as part of the master plan 10 years ago when we started this business. It was just a natural progression as 2 awesome partners have been working together very successfully for the last 10-plus years and an opportunity came up that worked for them, worked for us. So that kind of is a mindset. We think this will, like I said, grow our distributable cash per share, create shareholder value.

And with that, we'll have a better currency to continue pursuing royalty transactions with other franchisor across North America.

Okay. Great. And then in terms of the accelerated rate of network growth within Mr. Lube, I think Pamela discussed strong demand from new and existing franchisees as a factor behind that. But could you maybe provide a little more color on any changes in the competitive environment that have kind of allowed for a faster pace of new store opening? And where is taking share from at this point?

So right now, actually, you would have maybe as expected, COVID actually was a catalyst for us in terms of growth, mostly because the economy was tough, right? And you had some aging independent owners that didn't really want to go through the brain damage of having to work through labor issues and deal with supply chain issues and so -- and yes -- and invest in innovation. And so those became prime opportunities for us. And so when we look at expansion, even though the opportunities exist, I do want to make it clear, though, that we are very selective in our sites. And so we come across many, many, many opportunities to -- or independents that are looking for us to expand. And we -- it goes through a rigorous test internally for us.

And so we may come across -- well, we do come across a lot of sites that we end up turning down. The ones that we do select are the ones that actually pass our tests. The ones that we believe it could be franchised and a franchisee would do very well there. So -- but it speaks to really the fragmentation in the industry. There are a lot of independents out there. There's a lot of, like, as Sean mentioned, 3, 4, 5 store operators, and it's time sometimes for them to move on. And so we -- and the industry demands a bit more. So consumers require more. So we've been able to see that and position ourselves for growth that way.

Okay. That's great. If I could just sneak one more in, just in terms of the earnings expectations for Mr. Lube that you laid out, I think the expectation was $59 million of EBITDA in the 12 months post close. I mean the business did $46 million of EBITDA in 2025. So can you maybe just help us bridge how we get to almost 30% EBITDA growth?

Yes. I mean we've spent the last 6 months and obviously working with Mr. Lube over the last 10 years, understanding their business. We've -- as a private company, as you can imagine, there's lots of normalizations that are involved. And we're not going to get into the specifics of that, but we are highly confident in the business' ability to generate the uptick in cash flow because this is a normalized go-forward number, and I think that's where we'll leave it.

Your next question comes from the line of Gary Ho from Desjardins.

Congrats on the transaction. Maybe as a related question to the last one. Just wondering on the location count. So 187 today, path to grow double-digit store counts in the next 2 years. Curious, if you look out 5 years, what could that grow to? And then maybe at maturation over the longer term, what's the potential location count? And when I look at the store location by province slide, you're fairly underrepresented in Quebec. Can you elaborate on why is there a different customer preference or a larger competitor in that province? Just want to get your thoughts on that.

So yes, 2 questions. So in terms of location count, 189 by the end of the day, when we -- as I mentioned before, we will always grow the right way in terms of stores, right? Every store to us has to be a very strong store that can do well. We're not in the business of opening stores and closing them down, and that's never going to happen. And that doesn't happen and hasn't happened for like on my watch. And so 20 years I've been with the company, never seen it happen. And then we want -- we're going to continue to do that. So when we look at store count, we're at 189 today. I expect that the market in our space right now as it is in the quick lube space and tires doing convenience service offers, it can double. A lot of cities right now are starting to build out, as you know.

There's a lot of new markets that are growing, a lot of buildings that have gone up where consumers are starting to -- there's a draw in those communities that were previously considered small, that are now making sense for -- from a commuter standpoint to be there. So I do see that growing. But again, it will be done in a proper way. And so I wouldn't be surprised if we do see a doubling of the store count within -- I don't want to put out a date, but I would say that is something that we are actually -- we are quite focused on.

You mentioned Quebec, and that is really interesting for us. One of the stores that we are actually opening today is in Quebec. And that is an emerging market for us. It is untapped potential, and we are positioning ourselves to grow in that area. It has the highest do-it-for-me market. Right now, consumers are either do-it-yourself or do-it-for-me. And so in terms of services, and they have the highest do-it-for-me percentage. That in Quebec, there's not a lot of big brands out there, which allows us to enter in as a brand, but we are very sensitive and respectful to the culture and the language requirements in Quebec. And so when we move into Quebec, we do it in a very measured in a proper way, making sure that we work well with the city and that we are mindful of the type of operator that needs to be there. They need to speak the language, need to understand the culture. And so we are doing it in a very measured and delicate way. But that is -- that is definitely a province that has a huge growth potential.

Okay. Great. Maybe as a related question, I know you recently in the last few years, added tires to the product offering and there are other services. So I think you also mentioned mechanical work in your prepared remarks. Can you talk to that and other services or products you hope to add over the medium term?

Yes. So when you -- right now, our focus is always about trust and convenience, right? That's what we offer, and we will do it in every service offer that we provide. As we start to look at expansion, it makes sense to -- when we go into mid-market, some of these smaller communities to be that one-stop shop. Typically, our bays are 3 bays, right? If you go to any one of our urban centers, you'll see usually 3 or 4 bays. But when we go into these smaller markets or mid-markets, there are opportunities to convert 7, 8, 9 bays. And when you have that level of space, it opens up more opportunities to do services, also in the vein of convenience and trust, and that's where we see a huge opportunity.

Vehicle technology is also changing. People don't want to go to 5 different places to get their services done, right? And so -- and when you look at how vehicles are being made today and how they're evolving, it can be done in one shop. So when we've got access to 7, 8 days, we've got the ability to manage a flow so that it's a quick service, it can be done a certain way in certain days, tires are done in a different way and mechanical. It's really becoming an evolving model that allows our franchisees to do very well. It helps our customers go to one-stop shop and it's trust and convenience all the way through.

Okay. Got it. And then my last question, perhaps for Greg. Just the pro forma leverage looks a little bit elevated at least from a public company standpoint. How does the deleveraging glide path look over the next 12 to 24 months, call it? And just remind me what's your long-term leverage comfort range?

Yes. Historically, like right before this transaction, we're, call it, 2.5 turns of senior debt, under 3.5 turns of total leverage, including the subordinated debentures. Pro forma for this transaction will be about 3.5 turns of senior debt and about 4.7 turns of all-in debt. Now the all-in, as I mentioned, the subordinated convertible debentures, there's 2 tranches of those, and the one tranche matures in the summer of 2027 is in the money, so to speak, today, with the [ 405 ] strike. So pro forma, if you looked at that as equity or converting into equity, it would be more around 4.2 turns of all-in debt. And so we absolutely have a path and a plan to bring that total leverage back down below 4 back and walking back more towards historical levels.

So as we mentioned earlier at the start of the presentation, the payout ratio is going to be coming down. So our consistent and same dividend of $0.285 per share annualized compared to the pro forma distributable cash per share of over $0.34 is about an 82% payout ratio. And that, as I think I've mentioned in the past, is before considering the DRIP. So on a cash basis, it's even better than that. So that allows for some deleverage. And then as we look through the operational leverage growth and forecast of Mr. Lube, there's -- as that continues to grow, there'll be further deleveraging there.

So we have a plan to methodically bring that debt back down to in the relatively short term, the target of bringing it back below a 4x leverage and then over time, back more consistent with historical averages.

Your next question comes from the line of Michael Glen from Raymond James.

Pam, are you able to give any insight into within the Mr. Lube core services, what your current market share might look like?

So in the quick lube space for oil, obviously, our biggest -- it's a big part of our business. We are market leaders. If you actually look at percentages of market share, and this is based on just [ leaders board ] from information and sources that we see, it's roughly at about 45% in terms of the quick lube space on [ leaders board. ] And -- but for tires, it's harder for us to gauge that, but oil changes and oil is something we're more familiar with just based on our history.

And the range -- just to get a sense, like the range of services offered, like where would you sort of -- at what level would you sort of stop -- what kind of service level would you stop? I think you do brakes, I saw that on the website, but where does...

So it has -- so our litmus test is around trust and convenience, right? So when we look at what a customer needs in a short amount of time, they're just coming in for a quick oil change or they need a service, we can do -- there's so many services that come in that can be done within 30, 45 minutes. But if it takes the car to need to be basically an appointment, you have to leave the car there for a few days. That's a mechanical, a full mechanical requirement. And that is something we still also can do in bigger base. And so that is something we're -- and we're allowed to do that -- we can do that in these mid-markets where it really makes sense.

In a lot of urban centers, people -- there's a lot of mechanical work you can do in a very short amount of time, like spark plugs can be done very quickly. And so we will be doing those types of services. But our brand promise is trust and convenience, right? And convenience means in and out. But in smaller mid-markets where people think convenience also is, well, I'd like to leave my car and just get it done all at once, we offer that to you.

I see. Okay. And then just in terms of how you approach building out new stores, does the franchisor participate in the CapEx build-out and then the franchisee takes the store from the franchisor? Is there any dynamics such as that? Or is it all on the franchisee?

It's all on the franchisee. All our franchisees put the money up with these stores. We find the stores and we approve the location, we negotiate the lease and then the franchisee takes it from there to build the store according to our specifications.

Okay. And what -- how much has M&A up until now, you talked like the 189 stores you will be at, how much has M&A played a role in getting to that 189 number?

Well, it's usually around, like as Sean mentioned, like the 5, 6 store chains that we come across that a group of stores that we would like to purchase together and then turn them over to a franchisee. Those have come up. We've done quite a few 2 stores. We did one last year that was a 6 store. And so they come up rarely, but at the same time, they do come up. And when it comes up, it is something that we -- that helps to really boost our system.

Okay. And then just a modeling question, Sean or Greg, like the $516 million of system sales, like you will start to realize the full benefits of the $516 million. Like the number you give right now is just the stores that are in the Royalty Pool, I believe. So it would be the full $516 million that would start to get realized once the deal closed.

Yes, exactly. So as the owner of the business, we're getting obviously the benefits of the same-store sales on all the stores in the system and the full profitability of the business versus right now, we just get a top line royalty on a subset of the stores.

Okay. And how many corporate stores are there?

One.

There's one corporate store.

Your next question comes from the line of Jeffrey Fenwick from ATB Cormark.

I think most of my questions have been answered. But maybe just one on the real estate side of things. I think the release mentioned that the head lease and subleases are being moved off or out of the entity here. Could you explain how that's going to work and how that leasing dynamic works going forward?

Yes. I mean there's -- we had -- we've structured it so that there's -- the existing plumbing continues to hold the leases. And we're -- basically, we bought the assets of the operating company, and we'll be continuing to service those leases over time.

Okay. And then maybe one bigger picture question here is maybe you can just speak to how inflation impacts a business like this? I mean I can see pros and cons of maybe picking up share from dealerships. But we've heard from other sort of adjacent parts of the market like bodywork shops where it's made inflationary on labor and on price of parts and it starts to squeeze the margins. How do you navigate that environment with a business like Mr. Lube?

Yes. I mean the beautiful thing about the Mr. Lube business is, as you can imagine, with a lot of franchise businesses, the franchisee margins are fairly skinny. So when there is inflation, there is -- especially of the minimum wage and some of the expenses of those businesses. I can assure you in a lot of the businesses we've diligenced and locked in royalty deals with, there is a compression of margin, and it puts a substantial pressure on the franchisees.

Fortunately, the Mr. Lube management team here has been working with their franchisees. And like we said throughout the presentation, they have superior store level economics. So while there might be some compression, the margins earned by the franchisees are so superior that it's not going to put any financial stress on our partners. And so there's pros and cons to inflation. Obviously, it impacts the purchasing power of customers. But on the flip side, as a franchisor business, it does result in some price creep up. which enhances the profitability of the franchisor.

So it's a balancing act. The franchisees have been growing revenues so substantially over the last 5, 10 years that any creep from inflation growth should not be a substantial issue for almost any of our franchisee partners.

Okay. Well, that's the last question. We appreciate everybody for taking the time again to hear about what we've done here, this game-changing transaction with DIV and Mr. Lube and Tires, and we're excited to work with Pamela, her team, the franchisees of Mr. Lube and building out shareholder value for the shareholders of Diversified. And as we've said many times here, we're quite excited with this transaction and think the market will be as we move forward. So thanks again for all your time.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.