SFL Corporation Ltd. (SFL) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 SFL Corporation Earnings Conference Call. [Operator Instructions] I also must advise you that this conference is being recorded today. And I would now like to hand the conference over to your speaker today, Ole Hjertaker. Thank you. Please go ahead.

Thank you, and welcome all to SFL’s first quarter conference call. I will start the call by briefly going through the highlights of the quarter. And following that, our CFO, Aksel Olesen, will take us through the financials, and the call will be concluded by opening up for questions. Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include conditions in the shipping, offshore and credit markets. And for further information, please refer to SFL’s reports and filings with the Securities and Exchange Commission. While our business has so far not been materially impacted by the general market disruption caused by the COVID-19 pandemic, the Board believes it is appropriate to review the dividend payout level for SFL with a focus on maintaining a strong balance sheet and investment capacity over the next few quarters in a setting with more expected market volatility. The announced dividend of $0.25 per share represents a dividend yield of around 10% based on closing price yesterday, and this is our 65th quarter with dividends. The reported income was negative, but this was after some large non-cash accounting impairments on assets and swaps. The underlying business was robust, and these impairments did not have any impact on distributable cash flow from our assets. Over the years, we have paid nearly $27 per share in dividends or $2.3 billion in total, and we have a significant fixed rate charter backlog supporting continued dividend capacity going forward. The total charter revenues increased to $161 million in the first quarter, with nearly 90% of this from vessels on long-term charters and only around 10% from vessels employed on short-term charters and in the spot market. And all customers are current on their charter payments, so we have good cash flow visibility into the second quarter. The EBITDA equivalent cash flow in the quarter was approximately $120 million, and last 12 months, the EBITDA equivalent has been approximately $481 million. With a very large proportion of long-term charters and the fact that all customers are current with charter payments, the underlying business remained robust and cash position was $217 million, which was up from the previous quarter. And we have added to the charter backlog recently as a combination of asset acquisitions and charter extensions. And our fixed rate backlog stands at approximately $3.6 billion. This is in line with the previous quarter after adding $230 million recently through charter extensions and asset acquisition. We have been active in the financing market over the last 2 months and have addressed most of the financing maturities this year already. Terms have been attractive, and we have seen lower all-in interest costs than ever before despite the general market volatility. We believe part of the reason for this is the consistent performance of SFL the last 16 years and our ability to source capital from a much wider market than most other maritime companies. In February, we sold a 2002-built VLCC Front Hakata, which was the last vessel remaining from the initial fleet of 47 vessels acquired from Frontline in 2004. Net proceeds, was approximately $30 million with neutral book effect. We now only have 2 scrubber-fitted VLCCs remaining on charters to a subsidiary of Frontline and profit share in the first quarter was $5.9 million. Frontline has sub-chartered the vessels for most of the year at very strong levels, and we expect similar profit share contributions each of the next 2 to 3 quarters as well. And we have 1.4 million Frontline shares remaining. So the announced cash dividend of $0.70 per share is adding another $1 million to our cash position in the second quarter. During the first quarter, we sold all the vessels previously on charter to a subsidiary of Solstad Offshore. And after the delivery of the final vessel this week, we will have no offshore support vessels in the fleet. Solstad is in the final stages of a comprehensive restructuring. And when completed, we expect to receive approximately $1 million in cash and 5% to 6% of the restructured company. If this does materialize, it will be a book gain as we have zero value on this in our books today. And finally, today, we announced the acquisition of a new-build VLCC with long-term charter. The vessel is expected to be delivered from the shipyard in China later this month and will have full cash flow effect from the third quarter. The net purchase price will be $65 million, which is significantly below current broker estimates for VLCC resales, effectively providing us with a very attractive risk profile. Our chartering counterparty, the Landbridge Group has secured a 3-year sub-charter to an oil major, providing good cash flow visibility from the asset. And there will be purchase options for the charter and during the charter period first time after 3 years. SFL will fund the acquisition with a $50 million non-recourse debt facility at very attractive terms and net contribution after debt service, interest and installments during the first 3 years is estimated to more than $4 million per year on average. The COVID-19 pandemic has caused massive disruption in most transportation markets and for offshore assets. Many of our vessels trade regularly to Chinese ports, and we implemented already in January a robust emergency management plan with goals of ensuring the health and safety of our crew on board the vessels and onshore while maintaining our business operations as efficiently as possible. All crewing managers are following the guidance issued by the World Health Organization and the International Chamber of Shipping to ensure that the proper protocols are in place on board the vessels. We also host regular meetings with crewing managers in all our segments to discuss and handle any issues, in particular, challenging facing our crew and safe operations as they may arise. To-date, issues have primarily related to crew transfers and also some delays at shipyards in connection with dry docking and scrubber retrofitting of vessels. The spot trading dry bulk market has been impacted due to the sudden reduction in demand for transportation services, impacting earnings in the quarter. With revised expectation for world trade coming down for the remainder of the year at least, we estimate the net impact on SFL of approximately $0.02 per share per quarter compared to pre-corona performance, if you could call it that, until that market improves again. Also, subsequent to quarter end, one car carrier and a feeder container ship on short-term employment has been redelivered to us and are currently idle looking for employment. Another car carrier and a feeder container vessel will come off charters towards the end of the summer. In case all these 4 vessels have to be laid up in a worst-case scenario, the net impact for SFL is estimated to approximately $0.02 per share per quarter compared to pre-corona performance from these vessels. The car carriers seem to be more affected with the market virtually coming to a halt right now, while there is more market activity for feeder container vessels, and we hope, of course, that net result will be better. After all, the vessels more exposed to near-term market developments represent only 10% of our charter revenues and the 90% fixed rate revenues are more insulated to short-term market movements out there. And despite the impact of COVID-19 on global trade, all our counterparties are current on charter hire payments with good visibility for the second quarter, as mentioned before. We will, of course, continue to closely monitor developments in our customers’ end markets in order to be able to react quickly to any potential business disruption. At the same time, we also look for new business opportunities as illustrated by the acquisition announced earlier today. Following the recent charter extensions, our charter backlog stands at approximately $3.6 billion. And of this, more than $550 million has been added the last 12 months. Over the years, we have changed both fleet composition and structure, and we now have 87 vessels and rigs and no vessels remaining from the initial fleet in 2004. We have gone from a single asset class charter company to multiple customers. And over time, the mix of the charter backlog has varied from 100% tankers at the start to nearly 60% offshore at one stage to containers being the largest segment right now with more than 50% of the backlog. We do not have a set mix in the portfolio, focus is on evaluating deal opportunities across the segments and try to do the right transactions from a risk-reward perspective. Over time, we believe this will balance itself out. But we try to be careful and conservative in our investments and not just invest because money is burning in our pocket. Our strategy has also been to maintain a strong technical and commercial operational platform in cooperation with our sister companies in the Seatankers group. This gives us the ability to offer a wide range of services to our customers from structured financing to full-service time charters. But more importantly, we also believe it gives us unique access to deal flow in our core segments. And unlike most of the companies with a financial profile in the maritime world, 65% of our cash flow comes from vessels on time charter and only 35 from bareboat chartered vessels. We believe in diversification as a methodology to mitigate risk in the maritime markets as indicated just before here, and particularly, in light of volatility we have seen over many years in the maritime world. This diversification is not only with respect to asset types and counterparties, but equally important is the way we structure risk on our balance sheet. Unlike most maritime companies where the ultimate parent or topco, you can call it, guarantees all that in all subsidiaries. We are focused on managing risk and being careful with guaranteeing debt in our asset-owning subsidiaries. This is illustrated by this overview, where you can see all asset-level financing in SFL. Some are single asset and some are for several similar vessels. We call this our black swan insurance as it better insulates us from unusual events in single markets or for situations like it’s been caused by the current COVID-19 situation for that matter. Our preference would always be not to guarantee anything as that creates better optionality for us, but we do not mind guaranteeing in structures, but we have very low-risk like financing below recycling value of assets or where there are other features giving us a clear benefit. And in many cases, we only provide a partial guarantee. We have seen that this structure, from time to time, has given us significant leverage in negotiations. And a good example of this is in connection with the restructuring of Seadrill in 2017, where we believe we were able to negotiate vastly better deal for us than if we had guaranteed everything and everyone would have pointed at SFL corporate to sort out the structure for everyone who was involved with the financing. Of our asset-level financing, only around 60% is guaranteed by our parent company, SFL Corporation, and we also have 5 vessels without any financing attached. There has been some questions relating to offshore segment and the rigs we have on charter to Seadrill recently. Up until 2017, the offshore segment was our largest segment for a long period but just now down to around 25% of our charter backlog, and we now only own 3 rigs after divesting 5 offshore support vessels. The charter hire from the drilling rigs were $26 million in the first quarter. Two other rigs are harsh environment units working in the North Sea, with West Linus sub-chartered to ConocoPhillips until the end of 2028 and West Hercules is sub-chartered to Equinor until next year. The third rig, West Taurus, is idle and laid up in Norway. Seadrill is paying the agreed charter hire on all 3 rigs and we continued to reduce the depth on the rigs as per schedule. Given the high attention to the offshore segment currently, I would like to highlight the significant delevering that has happened the last 3 years as illustrated on this slide, where we compare what we call pre-chapter 11 for Seadrill levels on the financing and what it looks like at the end of March this year. We have reduced debt relating to these assets by more than 30% in this period. But more importantly, we have continued to have cash flow coming out from these assets on an ongoing basis. There is currently $0.07 per quarter aggregate free cash flow contribution from the rig, which after debt service. But importantly, the contribution is individual per rig and the idle rig West Taurus, only represents $0.02 per share per quarter. And we have limited guarantee obligations, as discussed earlier here, with less than 50% currently guaranteed by SFL. Seadrill has disclosed that they are engaged in discussions with our secured lenders to provide operational flexibility and additional near-term liquidity. We believe it will be in all stakeholders’ interest to have a financially stronger counterparty, and we are in a constructive dialogue with Seadrill to find a sustainable path going forward, particularly for the rigs that are idle, including the West Taurus. But for now, Seadrill keep paying the hire on schedule, and they had more than $1 billion in cash at the end of the last quarter. And any adjustment would, of course, in any case, be subject to approval by the banks in the respective syndicate. And with that, I would give the word over to our CFO, Mr. Olesen, who will take us through the financial highlights for the quarter.

Thank you, Mr. Hjertaker. On this slide, we have shown a pro forma illustration of cash flows for the first quarter. Please note that this is only a guideline to assess the company’s performance, and it’s not in accordance with U.S. GAAP and also net of extraordinary and non-cash items. The company generated gross charter hire of approximately $161 million in the first quarter with close to 90% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.6 billion, which provides us with strong visibility on our cash flow going forward. The liner fleet generated gross charter hire of approximately $78 million. This amount, approximately 96% was derived from our vessels on long-term charters. At the end of the quarter, SFL’s liner fleet backlog was approximately $1.9 billion, with an average remaining charter term of 5 years or 8 years in weighted or charter revenue. Approximately 84% of the liner backlog is the world’s largest liner operators, Maersk Line and MSC and during the quarter, as SFL extended the charterparty for three 10,000 TEU class container vessels until April, July and November 2024, respectively. And subsequent to quarter end, we also extended the charters for seven 4,000 TEU class container vessels with MSC until the third quarter of 2025. So in aggregate, these extensions add more than $170 million to SFL’s fixed charter rate backlog. Our tanker fleet generated approximately $30 million in gross charter hire in the quarter, including $5.9 million in profit split from our charters to Frontline on the back of a firm tanker market. Of this amount, 84% was derived from time and voyage chartering vessels and 16% derived from variable charters. It has also been a firm quarter for our Suezmax tankers despite one of the vessels entering the dry dock for special survey and scrubber retrofitting in March. The daily average time charter rate was approximately $58,000 compared to $33,000 in the previous quarter. During the quarter, SFL sold the 2002-build VLCC Front Takata and terminated the charter agreement with Frontline for the vessel. Net proceeds to the company, was approximately $30 million, and the book effect was neutral. And subsequent to the quarter end, 2 of our 2 VLCCs on charter to Frontline were fixed out on charters stretching well into Q4 at an average rate of approximately $70,000 per day, which provides us with strong visibility on the amount of profit share we can expect to receive in 2020 as all vessel earnings, about $20,000 per day per vessel are split 50:50 between Frontline and SFL. And as announced previously today, the company has agreed to acquire the 2020-built VLCC Landbridge Wisdom against a 7-year charter back. In terms of CapEx, the net purchase price of the vessel is approximately $65 million, which will be financed by a mix of equity and a $50 million non-recourse bank debt facility with an estimated all-in costs for 3 first years of below 3%. During the fourth quarter, our dry bulk vessels generated approximately $26 million in gross charter hire. Of this amount, approximately 83% was derived from our vessels on long-term charters. SFL recorded a noncash impairment charge of approximately $80 million relating to 7 Handysize bulkers in the first quarter, as the estimated future cash flows for each of these vessels did not exceed their book value. With limited long-term charter opportunities for these vessels, the company will look at opportunities to divest the vessels at a later stage when market conditions are right as part of our continued fleet optimization process. At the end of the first quarter, SFL owned three drilling rigs with long-term charters to fully guarantee the affiliates of Seadrill. The rigs generated approximately $26 million in charter hire. The harsh environment jack-up rig, West Linus is sub-chartered to ConocoPhillips until the end of 2028, while the harsh environment semisubmersible rig, West Hercules, is employed on consecutive shorter-term sub-charters to Equinor in the North Sea. The semisubmersible rig, West Taurus, is currently in layup in Norway. During the quarter, SFL agreed to terminate the charter agreements for 5 offshore support vessels with Solstad. 4 vessels were sold and delivered to unrelated third-parties in the first quarter where 1 vessel has been sold for recycling in Norway at the green recycling facility according to the European Ship Recycling Regulation. Following this, SFL has no offshore support vessels in the fleet, and the book effect of this was neutral. This summarizes to an adjusted EBITDA of approximately $120 million for the first quarter or $1.11 per share, compared to $123 million and $1.14 in the previous quarter. We then move on to the profit and loss statement as reported on the U.S. GAAP. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. As our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing. As a result, a significant portion of our charter revenues are excluded from U.S. GAAP operating revenues and instead booked as revenues classified as repayment of investment in finance leases and vessel loans, results in associates and long-term investments and interest income from associates. So overall for the quarter, we report total operating revenue according to U.S. GAAP of approximately $122 million, which is a lower number than the $161 million of charter hire actually received for the above-mentioned reasons. In the quarter, the company recorded profit split income of $5.9 million from our tanker vessels on charter to Frontline and $500,000 from fuel cost savings from scrubbers. And as previously mentioned, the company recorded noncash impairment charges of approximately $80 million related to 7 Handysize vessels. Due to the extreme market volatility towards the end of the quarter, SFL recorded $13.6 million unrealized loss on its marketable securities investments, and $23.4 million noncash loss relating to hedging derivatives, including interest swaps and currency hedges. So overall, and according to U.S. GAAP, the company reported a net loss of $87 million, including $114 million in noncash losses or $0.81 per share. Moving on to the balance sheet, with approximately $217 million of cash and cash equivalents at quarter end, including $10 million freely available cash in our subsidiaries accounted for as investments in associates. Furthermore, the company had marketable securities of approximately $60 million, with a net book value of $34 million. Subsequent to quarter end, the company reduced its shareholding in Frontline to 1.4 million shares. The average sales price of the 9.6 million shares divested since October 2019 was approximately $11 per share. Short-term debt includes, among other things, the $37 million purchase obligation on Frontline shares, $108 million of senior bank financing on vessels where SFL has secured time charter extensions at attractive terms, as well as the 2020 NOK senior unsecured bond maturing in June, which we effectively refinanced in January by the issuance of the new NOK bond in the Norwegian market. So based on the Q1 figures, the company had a book equity ratio of approximately 25%. Moving on to an update on our liquidity and CapEx, at quarter end, we had approximately $217 million in cash on the balance sheet, including cash held in wholly-owned nonconsolidated subsidiaries. In addition, the company had marketable securities of $34 million net based on market prices at the end of the quarter. This includes our shares in Frontline and ADS Crude Carriers as well as financial investments in secured bonds and other securities. Our CapEx is limited and we accept projected investment in the Landbridge VLCC, which will have a net contribution of a debt service of more than $4 million on average per year. The remaining CapEx is primarily related to scrubber installations on a 10,000 TEU class vessels on long-term charters to Maersk. Over the years, we are continuously expanding and diversified our lending group, which currently consists of approximately 30 international banks, with a growing number from Asia over the last few years. And while many companies in the maritime space find it challenging to secure attractive financing, SFL has strong access due to our size, track record and affiliation with the Seatankers group of companies. This is evidenced by the recent financings we have secured in a turbulent market environment, which includes a non-recourse financing of $50 million for acquisition of the Landbridge Wisdom with an all-in cost of less than 3%, including LIBOR, as well as a fully guaranteed financing of $175 million for some X container vessels with an all-in cost of approximately 1.9%, including LIBOR for a 5-year facility. In the current environment, we believe that SFL’s robust liquidity and unique access to capital is a true competitive advantage. Then to summarize, the Board has declared a cash dividend of $0.25 per share for the quarter. This represents a dividend yield of approximately 10.2% based on the closing share price yesterday. This is the 65th consecutive quarterly dividend. And since inception of the company in 2004, nearly $27 per share or $2.3 billion in aggregate has been returned to shareholders through dividends. And while we continue to collect revenue from a $3.6 billion fixed charter rate backlog, we have also upside from profit split arrangements from our VLCCs and Capesize vessels, in addition to profit split arrangements related to fuel savings on some of our large container vessels. Despite a relatively volatile market in 2020, we have already added approximately $230 million to our fixed charter rate backlog and we continue to explore new business opportunities. And while risk premiums on energy and shipping investments have increased with the recent volatility in financial markets, SFL has, at the same time, raised new fleet financings at the all-time low cost of debt and continued to expand its group of lending banks. The company’s objective has always been to create long-term shareholder value. And in the near term, adjusting the dividend is a way to achieve this by retaining cash in the company, and further strengthen both balance sheet and investment capacity. SFL’s business model has been continuously tested through its 16-years of existence, has been previously highly successful in navigating periods of volatility. And with that, I give the word back to the operator, who will open the line for questions.

[Operator Instructions] We will now take our first question, and this comes from the line of Randy Giveans. Your line is now open. Please go ahead and ask your question.

Gentlemen, how is it going?

Very well. Thank you. Yourself?

Alright, doing well, doing well. So yes, first, looking at the newly announced VLCC acquisition, it seems like another kind of interest rate arbitrage deal, like the Hunter VLCCs. So is this the primary type of deals you’re looking for in the current environment? Or do you prefer more kind of classical, longer-term charters with end users than owner operators? And then secondly, is this acquisition part of your strategy to expand your crew tanker exposure? Or is it just an attractive deal regardless of asset class?

Thanks. Well, I would say we are deal and segment agnostics. We look at time charter deals, we look at bareboat deals. And we could even look at financing structures for that matter. It’s all about risk-adjusted return for shareholders. Of course, we have to add another vessel in the tanker segment, but we don’t have a set strategy or set [indiscernible] for how many vessels or how much capital should be deployed in each segment. It’s all on a deal-by-deal basis. And just to illustrate that, I mean, last year, 2019, I think, we screened and did quite some work on deals aggregating around more than $20 billion, but we ended up just doing very few of those. Coincidence, you could say, why we don’t do one deal – why we do one deal and not the other, but we try to be careful when we do it. And here, we think it makes good sense. And I think also, our balance sheet and our, call it, standing in the market, makes us, I think, able to act when others can’t. So you could say that maybe also terms here are reflective of less competition in the market where many, I think, are more or less paralyzed.

Got it. Okay. That’s fair. And then for my second question, more than half of your contracted revenue is on container ships. So how do you view this sector in light of the current COVID disruptions and has there been any conversations around possible charter reductions and extensions?

Well, if you look at our charter portfolio, I believe, 85% – more than 85% of the backlog is linked to the two largest liner companies. As we all know, in the liner industry, I would say it’s similar, on an economic side, not on the market side, to the airline industry. It’s all about economy of scale and filling up the units. And we’ve seen the way the liner companies have managed this is effectively by blanking, what they call blank sailings i.e., they fill up some vessels and then leave some other vessels not sailing because that’s economical for them. We believe the larger companies and the bigger companies in this segment will come out as winner – winners because they have a better – they have a bigger and better infrastructure around it and will therefore, hopefully, be able to withstand volatility better than smaller marginal players who don’t have the flexibility to do just that. What we have seen so far is that the liner companies have been able to maintain margins and also relatively, I would say, smaller impact on volume than many have expected as they have reported first quarter numbers. Going forward or through the rest of the year, I believe, most expect effective, call it, liftings of boxes to come down. But again, it’s planned. And one of the mitigating factors that is for the line of companies here has been the fuel oil price drop, which means that if they’ve been able to maintain box rates at relatively similar levels, the net profit per box is much higher because the vessels spend less fuel. So there are some balancing factors. But obviously, container market is a reflection of world trade. So in the long run, of course, you will need world trade to recover and get back on the feet. But I think the smaller operator, more marginal operators, will be more – call it, at more risk than the larger, more integrated.

Sure. Okay. And no conversations around negotiations at this point?

No. No specific requests. You could always – I mean, you could – if you get a call where if you are asked if you would like to change the charter rate we usually politely decline.

Yes, understandable. Alright, that’s it for me. Thanks so much.

So, and what we have done, obviously – so it hasn’t been a topic for discussion what we have done call it in the past during call it market volatility. If you go back to the financial crisis 10, 12 years ago, what we did then in some few instances, if we – sometimes, if you have reduced your charter rate, you get it back with effective interest later. It’s – I would say it’s sort of a risk reward type analysis we would make, but we have been very deliberate in the choice of our counterparties in the container space and also in terms of what kind of risk we are willing to take in the space. So if you look at where the most of our effective capital is invested, it’s on modern eco sort of built after the financial crisis vessels in the 9,000 to 11,000 range where we have invested more, because we see that’s a very flexible and versatile asset type. Also in some instances for the very big vessels, we have structured those – in structures where we have no financial liability call it outside our invested equity, no guarantee liabilities relating to those vessels etcetera. So we have been deliberate in this and we have declined a lot of call it chartering opportunities for what we believe have been relatively more risky counterparties if you can call it that.

Yes, absolutely. Well, thank you for the color.

Thank you.

Thank you. And we will now take our next question and this comes from the line of Greg Lewis. Your line is now open. Please go ahead.

Yes, thank you.

Hi, Greg.

Ole, could you talk a little bit about not only the decision to reduce the dividend, but how did we come up with that number? I would seem to remember the last time you – the last time Seadrill entered a restructuring that the dividend was lowered around that, and it ended up not really impacting the business at all. I guess this is the second time it looks like that is happening. Just kind of curious, I mean, I think, you guys mentioned, hey, now we are at a 10% yield, just kind of wondering any color around why $0.25, why not $0.20, like just kind of how you’re thinking about that in terms of that as a go forward run-rate?

Yes, absolutely. Of course, adjusting the dividend down is a very – is a difficult decision. And I can tell you, it was a long discussion on it with the Board. If you look at it, and it wasn’t – and I can tell you, it was not set because the share happened to trade there and we sort of – we tailored the dividend after the share price. That was not the factor at all. We looked at it. If you look at the 3 rigs to Seadrill, the one idle rig, which you could argue, potentially because it’s idle, could be more exposed, is contributing $0.02 per share. So if you say, okay, $0.02 per share there. As I mentioned earlier, because the dry bulk market and the expectations for the dry bulk market has changed, we believe, compared to pre-corona type projections we had, the impact on all – and this is all the short-term charter dry bulk vessels, that in aggregate is around $0.02 per share. In case the 2 car carriers and the 2 sort of feeder size container ships that we have now either in the spot market or coming off charter in the near term, in case all of those are put in layout as a worst-case scenario, that could be another $0.02. So it’s sort of a – and also, I think, with the fuel price spread coming down, also, call it, there is – will be, at least in the near term, lower contribution from the profit split on some of the container ships compared to what we saw earlier in the first quarter, maybe another $0.01 to $0.02. So, that is more the reasoning, what has really changed in the business model, what’s changed in the near term outlook. And then, of course, making sure that SFL is a really robust entity that we have investment capacity. And right now, I think, having capacity to invest like we did – just did is a real strength because as we think – we think this is where you can find the really interesting investment opportunities. If you’re active and if you’re paralyzed for some reason, of course, it’s not good. You can say, could you cut it to 20? Yes, you could cut it to 10, you could cut it to 0. But in the end, we have an underlying 90% of the cash flow from long-term charters. Our underlying cash flow was – has not so far, in the first quarter, been materially affected. It’s just been the spot traded vessels, which is a such a small proportion anyway. And everything else is going as clock work. So we believe then a $0.10 is appropriate. It’s, call it, factoring in several potential, call it, events and hopefully also ensuring that we have a very robust balance sheet and good investment capacity. So it was a long, long answer, but I think it’s certainly a lot more than just looking at what the share price happened to be and sort of navigating after that.

Okay. Perfect. And then just, I mean, clearly, that decision put a little bit more cash inside the company. Clearly, these are – here I’m precedented often. I don’t know what these days are, but it would seem like, given your business model, this should be an opportunity over the next 6 to 12 months to potentially deploy a fair amount of capital at attractive type returns. You mentioned dry bulk, you mentioned container ships earlier, as some of these customers need. However, we want to refer to it increased liquidity, access to capital, realizing that it really has only been a couple of months, has the pace or the phone, however you want to think about it, have more opportunities increased? Or just given all of the uncertainty, is the market really moving towards more of a standstill where we kind of need to see where the dust settles out before we could see opportunities? I mean, obviously, there’s going to be these – like one-off taker deals or transactions. But in terms of kind of larger type transactions, are those kind of been put on hold as a result of all this?

I think, if we look at the market generally, as the COVID-19 pandemic really took hold, I would say there was almost like a bit of a vacuum from a deal. I think everybody almost throws in a way. But we see it now sort of – we see more deal flow now last couple of weeks than we saw if you go back two months, for sure. And I can tell you that, if you have a strong company, you’re in need of effective liquidity. We think it’s a good risk-reward. We will be your best friend. You may have to pay a little more for it now than you used to. But very happy to deploy capital if the risk-adjusted return is good. And if asset prices should come down, it means it’s a more interesting entry point.

Okay thank you everybody. Thanks for the time.

Thank you. And we will now take our next question, and this comes from the line of Liam Burke. Your line is now open. Please go ahead.

The recent VLCC purchase was at a fairly healthy discount to what the typical VLCC newbuilds are selling for. Could you give us a sense as to why you were able to acquire at such an attractive price?

It was basically in combination of the financing amount required by the Landbridge Group and what we were kind of believing is kind of a good risk-adjusted entry point for assets of that kind. Further we had consideration that the vessel has a three year charter to an oil major for three first years. So for us, we get a good entry point as well as a very good visibility on the cash flow for the first 3 years, taking down quarter residual significantly. And with the attractive financing we have secured on the back of it, it’s a good – very good investment for SFL.

Yes, it was. And on the asset, you’ve managed your portfolio, you’re asset agnostic. We talked about some opportunities on the acquisition side. What about on the divestiture side on the assets? Are there areas that you see opportunities to sell at attractive prices?

I would say right now, I think there would be only opportunistic buyers there. So I think divesting in the portfolio right now is probably not the best time. We have – we are looking at – we have the seven small Handysize bulkers in the fleet. We don’t really see any real long-term chartering opportunities around those. So over time, it would be logical for us to find new homes, so to speak, for those assets. But again, we don’t like to sell chicken on a rainy day. And we tried to manage it to optimize value, obviously. So whether we happen to – whether we sell them later – this quarter or later this year or late next year, that’s all down to what we think we can get for that.

Yes, absolutely. I mean, a good example is that we sold the Front Hakata, which was the last, call it, legacy vessel from the original SFL fleet back in February at $30 million, and that was an 18-year-old vessel that now, call it, two months later, we’re acquiring a brand-new VLCC scrubber-fitted for $65 million. That’s what kind of we like to look at that and take an exit on kind of all their assets when the timing is right and acquiring new ones in a good time of the cycle.

Okay thank you.

Yes, thank you very much.

And we will now take our next question and this comes from the line of Chris Wetherbee. Your line is open. Please go ahead.

I wanted to come back to the dividend just for a moment and make sure I sort of understand some of the comments around it. So it sounds like there’s about $0.07 of cash flow at risk around the offshore, the rigs. You also talked about $0.02 around the car carriers and the feeder containers. And that appears probably to be more of a temporary dynamic than maybe a longer term issue. I guess, we’ll see. Can you talk a little bit about sort of the total context there? Do you feel like you sort of insulated or ring-fenced that risk around those specific assets? Is that kind of the approach that we took? I just want to make sure I understand how you feel about the sustainability of $0.25 in the context of those collectively.

Yes. So when I discussed that, it was really more to sort of give some perspective on some of the reasoning, call it, with the Board on the dividend capacity. And of course, the very difficult, call it, decision to actually reduce the dividend in a setting where the underlying cash flow is virtually unaffected in the first quarter. So it’s a combination of that. And for those 3 rigs, yes, there – it’s 7 in aggregate. But there are 3 individual rigs with individual financing structures. And you could see, in a scenario where we keep 2 rigs and we leave the other behind, so to speak, or – so there is some flexibility around that. Same thing, on the other effects, I totally agree, hopefully, it’s short term. And hopefully, it will pop back. But at least it’s now there is more uncertainty and in more uncertain times, call it, showing – having a very strong balance sheet, having good investment capacity, we think will be better – give better long-term shareholder value than necessarily closing your eyes and paying out like we did last quarter.

Sure. No, that certainly makes sense to me. I appreciate that color. And then when we think about the debt guaranteed by SFL around those 3 specific rigs, can you give us some of the potential scenarios that you might see as that process kind of plays out? Or just trying to get a sense of what ultimately may happen there with those buckets, which I appreciate you guys were very clearly laid out in the deck, but just a sense of how that might play out?

Absolutely. I mean – and there – I just want to highlight the fact that 2 of the rigs are, what I would say, state-of-the-art, harsh environment drilling rigs, and one with a charter all the way through 2028. So you can say many scenarios, and you can have your opinion on Seadrill and Seadrill’s financial strength, etcetera. But we know that this is cash flow. It’s a very good performing rig. And of course, they are obligated to pay the charter hire. They are obligated to pay the charter hire on all three rigs, same thing also for the West Hercules. It’s been upgraded for several hundred million dollars working through the winter in the worst harshest environment in the world with very good uptime. So Equinor just extended the charter on that one in the midst of the, call it, COVID-19, call it, market here, so again, in a setting where we think that, that will be a robust asset also going forward. But – and importantly, as we also try to illustrate in the presentation, what happened since the last time Seadrill had – were in trouble, so to speak. And at the end of 2016, it became clear to everyone in the market that they had to do – had to go through a restructuring. We have de-levered those assets more than 30%, and we have reduced our exposure along with that in the meantime. So – and if something should happen, say, it was a complete meltdown and, what we say, there was nothing left there and we took the asset back, our guarantee is unlimited to the amount we stated, but individually. So at that point of time, in that – call it, in a worst-case scenario, we could elect to say, okay, West Taurus, which isn’t working right now, we will leave that behind. We will leave it over to the banks and the banks would – we would pay up on the guarantee, which is money we have. So it’s not a problem for us, and they will deal with it. Of course, I wouldn’t expect that to happen in any scenario because I think we would be much better positioned to maximize the value of any asset in a portfolio than sort of a financing institution. But of course, it gives us better flexibility. And you can maybe negotiate mutually sensible terms because we can – we hopefully can manage it differently than a bank. But of course, the base case here is that Seadrill – it comes through this, call it, near-term soft market, that they continue to pay the charter rate as they should or maybe – or for one or some of the idle rigs, maybe with some delayed charter payments potentially. But in the long run, they should come back. They’re one of the market leaders, particularly on the harsh environment side and also in jack-ups. So I don’t think it’s pitch dark and they have more than $1 billion in debt at the end of last quarter.

In cash.

In cash, yes.

In cash. Okay, okay. No, that’s – I appreciate. That’s great color. And then I guess the last question would just be how you think maybe about your optimal sort of leverage as negotiate or sort of navigate through this challenging period in 2020? I don’t know if there’s the cash available for de-leveraging this year. How you kind of think about that? But could you give us a sense of where you’d like to be, where you think optimal sort of balance sheet looks like at this point?

Yes. Thanks. I mean our philosophy is always to be long term, and with that cause kind of a constant leveraging on all the acquisitions that we do. Of course, we’ve had some – the equity ratio has gone down somewhat over the last few quarters. So obviously, it’s focused to have robustness and a good buffer on that. So obviously a focus in the near-term to kind of strengthen the balance sheet, so– but again, we have a very good relationship with the banking group. Cost of capital has come down for us. I think we are in a good environment to have some excess cash to – [indiscernible] exactly to de-leverage now over a period of time.

Okay perfect. Very helpful. I appreciate your time.

Thank you.

No further questions that came through. Sir, you may continue.

Thank you. Then I would like to thank everyone for participating in our first quarter conference call and also thank the SFL team both on board the vessels and onshore for their tremendous effort in a very challenging time and commitment to continue building the business. If you have any follow-up questions, there are contact details in the press release or you can get in touch with us through the contact page. It’s on our web page, www.sflcorp.com. Thank you.

Thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect.