Earnings Labs

SFL Corporation Ltd. (SFL)

Q4 2021 Earnings Call· Wed, Feb 16, 2022

$11.40

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Transcript

Operator

Operator

Good day, and thank you for standing by. Welcome to the Q4 2021 SFL Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ole Hjertaker. Please go ahead.

Ole Hjertaker

Analyst

Thank you, and welcome to SFL's fourth 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. Forward-looking statements are not guarantees of future performance. These statements are based on our current clients and expectations and are inherently subject to 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 includes but are not limited to, conditions in the shipping offshore and credit markets. You should therefore not place undue reliance on these forward-looking statements. Please refer to our filings with the Securities and Exchange Commission for more detailed discussions over risks and uncertainties which may have a direct bearing on our operational results and our financial condition. The announced dividend of $0.20 per share is an increase of 11% over last quarter's dividend and represents a dividend yield of around 9% based on closing price yesterday. This is our 72nd quarterly dividend and over the years, we have paid more than $28 per share in dividends or $2.4 billion in total. And we have an increasing fixed-rate charter backlog supporting continued dividend capacity going forward. The total charter revenues was $166 million in the quarter, with around 75% of this from vessels and long-term charters and around…

Aksel Olesen

Analyst

Thank you, Mr. Hjertaker. On this slide, we've shown our pro forma illustration of cash flows for the fourth quarter. Please note that this is only a guideline to assess the company's performance and is not in accordance with U.S. GAAP, and also not of extraordinary and non-cash items. The company generated gross charter hire of approximately $166 million in the fourth quarter, including $7.5 million of profit split with [indiscernible] with approximately 75% of the revenue coming from a fixed charter rate backlog, which currently stands at $2.8 billion, providing us with strong visibility on our cash flow going forward. In the fourth quarter, the liner fleet generated gross charter hire of approximately $90 million, including approximately $3.4 million in profit split contribution related to fuel savings on some of the large container vessels. Of this amount, more than 90% was derived from our vessels on long-term charters. Following the company's recent acquisitions, SFL's liner fleet backlog currently stands at approximately $2 billion, with an average charter -- remaining charter term of approximately 4.4 years, or approximately 7.3 years equated to charter hires. Including recently announced transactions as well as 16 crude oil products and chemical tankers, the majority employed on long-term charters. Our tanker fleet generated approximately $17.5 million in gross charter hires during the quarter. Of the net charter hire received more than 75% was derived from our vessels on long-term charters, among others Frontline and Phillips 66. The net charter rates from the company's two Suezmax tankers employed in short-term market was approximately 3.1 million compared to 1.7 million in the previous quarter. Late in the fourth quarter, SFL took delivery of one Suezmax tanker and two LR2 product tankers with five years charters to Trafigura. The remaining two Suezmax tankers, two LR2 product tankers will…

Operator

Operator

Thank you. [Operator Instructions]. And the first question comes from the line of Randy Giveans. Please go ahead.

Randall Giveans

Analyst

Howdy team, SFL. How's it going?

Ole Hjertaker

Analyst

Hi, there, Randy. Nice to hear from you.

Randall Giveans

Analyst

Yes, sir. So looking at your fleet here, you recently took delivery of numerous tankers, you sold right some of your dry bulk vessels. Now currently dry bulk is only about 11% of your contract backlog basically the smallest sector in that. And then with the recent pullback in asset values over the last few weeks and even months, despite further strengthening in charter rates, is dry bulk the asset class of choice for growth at the moment, if not what sector is?

Ole Hjertaker

Analyst

Yes, we looked at opportunities across the board in all these segments. I'd say generally and then certainly we wouldn't mind do more deals in the dry bulk space. But we also have to be cognizant of sort of market structure in that segment, typically dry bulk vessels are traded more in the spot market, and on long-term sort of logistical type solutions. So our preference is, of course, longer-term charters. And there are not that many long-term charters, call it, into dry bulk market, despite the numerous vessels there. So we are chasing transaction opportunities wherever we can find them. And I think with our diversification, as you pointed out, we can look at the deal opportunities in many segments at the same time, and they're not tied to only one sub-sector. So, yes, we look at opportunities there, as we do elsewhere, as well. And - but to kind of be specific, we always -- we were happy to announce deals as we do them. But we cannot sort of speculate on how much we should invest in each segment.

Randall Giveans

Analyst

Sure. That's fair. I don't expect you to give all your cards away here. And I was going to ask some questions about the drilling rigs, but sounds like your mom on that for now, which is understandable. So looking at the dividend, great to see that kind of continuing to rise? Is the plan there to slowly increase that going forward? And what are some of the hurdles or maybe catalysts for further increases?

Ole Hjertaker

Analyst

Absolutely, I mean, we are always happy to please our or their shareholders. And we've been paying dividends now 72x. So we were starting to get the track of that one. The dividend - and this is more based on our dividends, you can say policy or communication policy around dividend. We will never guide on forward dividends. Dividend is set every quarter by the board and at the discretion of the board. But of course, as you well know over time, and over these 72 quarters, it's typically been stable or increasing and with only with -- of course, some adjustments, when there has been market events sort of driving it. So, of course, as we have been doing quite a bit of business, new business last year and billion new investments, et cetera, that will come onstream cash flow from these tanker vessels, for instance, we will have quite a bit of cash flow from those vessels are already in the first quarter and full cash flow effect in the second quarter. And also other transactions is, of course, we do this only with the one sole mindset that, we hope to increase distribution capacity going forward, but exactly how much and when I cannot tell you.

Randall Giveans

Analyst

Yes, no that's fair. Well, thanks again. That's my two questions.

Ole Hjertaker

Analyst

Thank you very much.

Aksel Olesen

Analyst

Thank you.

Operator

Operator

Thank you. Next question is from the line of Greg Lewis from BTIG. Please go ahead.

Greg Lewis

Analyst

Hey, thank you and good afternoon, everybody. And Ole, sorry I missed you in New York last week. Question of around, just following up on Randy's question around the dividend. Clearly, you're not going to give any guidance around the dividend. But it does seem that we're kind of targeting some sort of percentage of cash flow, at least that's what it's looked like over the last couple of quarters. Is that kind of a fairway to think about the dividend going forward? Or is it more a function of your outlook on the market?

Aksel Olesen

Analyst

I think, as Ole said, in a way we don't give any guidance and promises on dividends, I think it was important for us is to see that they have a good sized capital going forward as kind of can -- we can have a sustainable dividend going forward. And that's to build a business it's kind of natural that they are able to also increase their dividend over time. So it's going to -- we don't think it was specific percentage, et cetera. So it's going to see what the sustainable, what's the contribution from net cash flow in each quarter and what’s the outlook going forward as well. And then that's [Multiple Speakers].

Greg Lewis

Analyst

Okay, that makes sense. Okay. And then so I mean, you -- in the press release, you mentioned that seven vessels are unencumbered. You mentioned the actual estimated fair market value of those vessels. Is there any way to think about the potential borrowing ability on those vessels? How should we think about that?

Aksel Olesen

Analyst

Absolutely. I mean, we intend to draw up the facility on the four electrophilic tankers later this quarter.

Ole Hjertaker

Analyst

Yes. And I will say, part of the reason for having that and having someone to come in vessels is that it enables us, given our financial flexibility, it enables us to go ahead and close on transactions early, and not wait on the financing to be arranged to get a deal done. So you can say the net effect there is that we get the benefits of the cash flow from the vessels early, and then we secure and source the financing, and, of course, the best possible terms some weeks later. So that was sort of the incident. We also have some smaller, obviously, it's like the older vessels that are unencumbered. And we don't have any immediate plans necessarily to put leverage on them, but we have the flexibility, all the ways that you can do it on short notice if we need to. So you could say it's sort of - we have -- it's just sort of you could say it's -- you could say it's a part of spare, call it, investment capacity. And with our portfolio assets, there will be situations where some have lower leverage, and maybe we can refinance. If we think that leverage has come down too far compared to asset values and vice versa. So it's an ongoing, call it, dynamics in any company.

Aksel Olesen

Analyst

Exactly our portfolio approach. And as a general observation, we see that there's - we have increasing access to attract very attractive capital, with either more new banks coming in competing on terms. So I think, first of all, it's a very good environment.

Greg Lewis

Analyst

And then, as I look at the portfolio, I mean, clearly, asset prices have gone up almost exponentially in containerships. Clearly, that's your largest pool of assets in the portfolio. As you're thinking about that business, and as you're thinking about those assets, and you're talking to your lenders, realizing that the bulk of your assets are on long-term contracts. So maybe we're not full - we're not really going to benefit from the strength in rates that is driving those asset prices higher. That being said or would we -- is there an opportunity to put on additional leverage on any of those, whether it's container ships or other assets, where prices have gone higher despite the fact that a lot of those vessels are on long-term contracts?

Aksel Olesen

Analyst

I mean, you could potentially, that's not really how we think about that. I think, as a shareholder, I would think that the value of our backlog is really kind of the value of the counterparties. And if you see that the majority of the backlog around 2 billion into I would say, probably investment grade counterparties. I think that's the strength of the company. And you have extremely good visibility on that cash flow. And we have been very particular on choosing the counterparties that they have in the portfolio that those are companies that do believe will perform, even this kind of the charter marketing will soften which it will in the future. So it's more kind of having substance in the company and oppositely kind of using that to leverage up, because you also have a minimum value clauses in loan agreements, et cetera. So you just have to be very prudent in deciding what to do.

Operator

Operator

Thank you. Next question comes from the line of Liam Burke from B. Riley. Please go ahead.

Liam Burke

Analyst

Yes, thank you. Asset values are up, not only with containers, but pretty much across the board and all your vessel classes. How has that affected your acquisition backlog? I mean, are you still seeing the opportunity? Or have your opportunities gone down? Are you still looking at a attractive pipeline?

Aksel Olesen

Analyst

I think if you look at their competitive advantage, I would highlight the COVID strong operational platform that they have and the fact that if you look at the portfolio approximately 90% of revenues are from time charters done and only 10% from bareboats. We basically have a different approach to deal origination. And we also see a lot of kind of repeat, or inquiries from existing clients which should be kind of relationships that were built over many years. So I think in terms of kind of new opportunities, we of course, both speak to few brokers we also talk to our clients. And we see a nice, I think it's a good deal flow, if you see more deal flow in terms of time charter stability and more financially driven deals like bareboats as many of the banks are coming strongly back to lend as well as kind of Asian [ph] money. The thing for us we continue to see attractive opportunities.

Liam Burke

Analyst

Fair enough. You mentioned in your prepared comments, that technology and -- is important for obvious reasons on emissions going forward. Are there any vessels in your fleet that you would think okay could provide technological risks -- could provide technological risks, to allow you to sell sooner? Trym Sjølie: Well, risk maybe a strong word there. But if we look at our fleet, the vessels that are maybe the sort of the least ideally going forward will be smaller bulk carriers, the vessels where we see, well which we are quite positive to that's the big tankers, they are -- they will not have a problem from that perspective, and also our large containerships are in a good position. And especially if we look at our new building programs, with the LNG dual fuel car carriers, they're also going to contribute very well towards the overall fleet, carbon intensity indicator track because when we are coming into 2023 and forward is going to be an increasingly aggressive target to stay ahead. But with our current fleet, we are well-positioned we think.

Ole Hjertaker

Analyst

And I think maybe just add to Trym's comment, that is Trym Sjølie, our Chief Operating Officer, maybe also add to that, that we will have our ESG report out in a few weeks' time for the last year, I think you will see if you compare the report from the previous year, you will see a very significant change in our fleet composition and the metrics, as a combination of our acquisition, so of very efficient vessels, including a dual fuel new buildings, and the sale of less efficient the small bulkers that we also disposed of last year, and also many small feeder containerships that were disposed of in the middle of the year, that which were generally quite old. And therefore had a negative impact on our average on those metrics. So I would say we are very focused on these issues. And of course, our mindset is that we should continue to develop our portfolio over time with that, of course as one of our key decision elements.

Operator

Operator

Thank you. Next question comes from the line of Chris Wetherbee from Citigroup. Please go ahead.

Unidentified Analyst

Analyst

Hey, thanks, guys. It's [indiscernible] on for Chris. Maybe we can start with the COVID comments quickly. I'm just curious if we can quantify what the COVID impact on crews was from an expense standpoint, in terms of the headwind?

Aksel Olesen

Analyst

Sorry, fantastic question there. I mean, the cost of the true COVID costs for us is pretty round numbers $1 million per quarter. And that seems to be quite steady was during last year and it seems to be approximately where we are at the moment, too. And this has to do with travel costs and quarantine and general sort of delays in moving people around.

Unidentified Analyst

Analyst

Great, that makes sense. Can we talk about CapEx, so where do we currently stand with that looking forward here, what's the mix and the strategy is that going forward there?

Aksel Olesen

Analyst

Yes, I think really the only outstanding CapEx currently is of course car carriers, dual fuel new buildings coming up with China, with 10 new charters to Volkswagen Group and K-Line respectively, we are in active discussions with several financial institutions, it's says more about optimizing their financial terms than anything else, we have received extremely strong interest based on kind of, yes, quality of the ships, fuel relogs both quality up to counterparties in their [ph] interesting segments with good supply demand, outage, so yes.

Ole Hjertaker

Analyst

Yes, and of course we have paid down installments to the shipyards for all those four vessels as well. So, we don't expect a very significant call it CapEx, net cash CapEx, because most of the remaining investments in those vessels can be covered by financing. Of course, we focus on optimizing that and minimizing the cost of that capital, of course, but from an overall perspective with a $4 billion balance sheet, I think we have a very low CapEx in sort of in relative numbers.

Unidentified Analyst

Analyst

Sure. Just following up on that one thing you said, I'm just curious, what is the backlog or the congestion in the shipyards you're seeing right now?

Aksel Olesen

Analyst

Congestion, well we see if you want to go out to get new vessels, typically car carriers containerships now, you'll probably be looking at 2024, even 2025. So if you want to go to sort of first or second tier yards in Asia, like China or Korea, so I don't think you will find many 2023 deliveries at the moment. So we are taking a look at late 2024, early 2025, I think that answers your question.

Ole Hjertaker

Analyst

And also prices have been going up, there is inflation of both in raw material, but so and also labor in these countries where most of the ships are being built, so this is also helping our overall fleet structure, or I would say any shipping companies in the fleet portfolio, because it's new building prices is in a way, pulling off also secondhand values as a percentage of replacement costs, which is benefiting us. So, we don't mind call it increasing shipyard prices. And as we do new transactions, as long as we can get charters that is reflective and gives us a decent return, even if prices are coming up, we are still good to do new transactions at higher price.

Aksel Olesen

Analyst

And some yards are reluctant to take orders going much further in or further out I mean than sort of mid 2024 because of the risk of rising steel prices and general inflation. So the yards are also a bit reluctant not to take new orders very far into the future.

Operator

Operator

Thank you. And with that, I would like to hand back over to the speakers for final remarks.

Ole Hjertaker

Analyst

Thank you. Then I would like to thank everyone for participating in our conference call. And also thanks the SFL teams on board the vessels and onshore for their continued efforts day and night in delivering value for our shareholders. If you do have any follow-up questions, there are contact details in the press release or you can get in touch with us through the contact pages on our webpage www.sflcorp.com. Thank you.

Operator

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.