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SFL Corporation Ltd. (SFL)

Q2 2018 Earnings Call· Wed, Aug 22, 2018

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Transcript

Operator

Operator

Good day, and welcome to the Quarter 2, 2018 Ship Finance International Limited’s Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ole Hjertaker. Please go ahead, sir.

Ole Hjertaker

Management

Thank you. And welcome everyone to Ship Finance International’s second quarter conference call. With me here today, I have our CFO, Harald Gurvin and Senior Vice President, André Reppen. 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. For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission. The Board has declared a quarterly dividend of $0.35 per share. This dividend represents $1.40 per share on an annualized basis or 9.5% dividend yield based on closing price of $14.75 yesterday. This is our 58th consecutive dividend and we have now paid 24.50 per share in dividends or more than $2 billion in aggregate since 2004. The reported net income for the quarter was approximately $60 million or $0.15 per share. This is after an impairment charge of $22 million relating to the sale of the three VLCCs after quarter end. Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries, accounted for as investment in associate was approximately $141 million and the EBITDA equivalent cash flow in the quarter was approximately $108 million. Last 12 months, the EBITDA equivalent has been approximately $440 million. In the second quarter, we successfully issued a new $164 million convertible note. This note…

Harald Gurvin

CFO

Thank you, Ole. On this Slide, we have shown a pro forma illustration of cash flows for the second quarter compared to the first quarter. Please note that this is only a guideline to assess the Company's performance and is not in accordance with U.S. GAAP. Total charter hire for the second quarter was $138 million, up from $129 million in the previous quarter. The main reason for the increase is the delivery of 19 container vessels during the second quarter. The 15 feedser size container vessels were delivered beginning of April and close to two quarter cash flow. While the four large container vessels on charter to Evergreen were delivered in May and will have the full cash flow effect in the third quarter. We also expect to take deliveries of two of three containers vessels announced today in the third quarter and last one in early October. We should then have close to full earnings effect in the fourth quarter. Revenues from tankers were slightly down in the quarter due to the sale of one VLCC in the first quarter and lower earnings on the two Suezmax tankers trading in the pool. We received full charter hire on eight VLCCs on charter for Frontline Shipping in the second quarter, contributing approximately $1 million of the EBITDA per vessel. But until the market recovers above the base charter rates, the contribution from the vessels going forward will be based on the actual performance. Three of the vessels have been sold post quarter end, leaving only five vessels. Dry bulk revenues were in line with the previous quarter, but offshore revenues were down due to the agreements on the five offshore support vessels on charter to Seadrill vessel. In light of the challenging market, we received no charter hire in…

Operator

Operator

Thank you [Operator Instructions]. Now we will take our first question from Randy Giddens from Jefferies. Please go ahead your line is open.

Randy Giddens

Analyst · Jefferies. Please go ahead your line is open

So quick question on just for modeling, looking at the asset sales. We do expect to deliver the three older VLCCs, namely what months? And same thing, what month do you expect to deliver the Soehanah later this month -- later this year?

Ole Hjertaker

Management

So the three VLCCs, two of them have been delivered already to the new buyer and so one was delivered mid-July, one was delivered a week ago and one is expected to be delivered in a week’s time. And for the Soehanah, there is more flexibility for the buyer on the exact date. So there’s a couple off date in mid-December but in the mean time, we will receive the $10,000 per day bareboat higher.

Randy Giddens

Analyst · Jefferies. Please go ahead your line is open

And then you mentioned that the EBITDA contribution for the three 10,600 TEU containerships will be a little over $35 million. Was the purchase price closer to 8 times or 10 times this multiple?

Ole Hjertaker

Management

I cannot give you specific guidance on that, I’m afraid.

Randy Giddens

Analyst · Jefferies. Please go ahead your line is open

I look at what the LTV of the $200 million loan, but I guess that won’t help either. So you mentioned your current contract backlog is about 44% containerships, 10% tankers. Do you expect this wide different to remain intact next year or do you expect to get more active in the tankers space now that you only have a handful of older VLCCs remaining?

Ole Hjertaker

Management

Well, we have been looking at the larger opportunities, I would say, across the board. Of course we cannot be specific on anything other than the deals we actually end up doing, but we have looked at also opportunities in the other sectors. We have of course our objective is to have a balanced portfolio. But again, of course the bottom-line is to do the right deals. So based on the deals we have done recently that those are the deals where we have felt that we have the right combination of assets, structure counterparty and also received exposure and financing where that cocktail, if you call it, that works for us. But we would of course also be happy to do deals in the other segments. But I would say generally it’s because -- and as we see new deal opportunities almost on a daily basis. So that is all about cherry picking the deals and do the right deals and hopefully build the portfolio on that basis.

Randy Giddens

Analyst · Jefferies. Please go ahead your line is open

One last question from me, so SFL roughly -- your coverage ratio 1.2 to 1.3 times, it will be for the rest of this year 2019. Can you comment on maybe the dividend sustainability or possible growth over the next two years now to new containerships?

Ole Hjertaker

Management

So I think if you take a step back here, we have been very quiet on the execution front for a period and that was linked to the feeder restructuring where we wanted to be seen as a very strong -- and also financially we were reporting cash to ensure that we have had a lot of flexibility in that process. Now that is behind us and we are now putting more capital to work. So I would say some of the deals we have done would also be something almost like a catch up a little bit in terms of ordinary deal flow that you need to do on an ongoing basis given the portfolio we have. Of course, the objective when we do new deals is that it is accretive for our shareholders, but we cannot give you specific on timing for that. And also the board reserve, always reserve the right to never give protections on dividends but history tells us that there have been very rarely a downward adjustment and normally is stable or increasing. So hopefully we can continue that and build the dividend also going forward, but we cannot be specific on timing or amounts.

Operator

Operator

And your next question comes from Greg Lewis from BTIG. Please go ahead your line is open.

Greg Lewis

Analyst · BTIG. Please go ahead your line is open

I guess just following up on Randy's question. Clearly, there's a lot of deals and transactions to be done here as we look out over the next three, six, 12 months. You’ve been very active in the liner business here, your three deals more recently. At what point is too much liner -- or container ship or liner exposure? Are we comfortable having 50% of the portfolio being in these types of assets just given their long-term coverage and counterparty risk?

Ole Hjertaker

Management

I think as we look forward, on our side, we’re not so focused on percentage mix it’s all down to the individual deals. And the way we do the deals just as we built them, we put them in separate vehicles underneath Ship Finance parent and then we try to structure it with financing where we also limit guarantee obligations going up. So we have -- in the past for instance, we had a very high percentage of offshore exposure at one time, simply because at the time those were the right deals to do and they were chunky deals and therefore they were weighing much in the portfolio. So going forward I don’t think we can give any guidance that we would grow evenly across the board in the various segments, but of course we want to have a diversified portfolio. And therefore, hopefully, as we also continue growing the container side, we will also grow the other sectors is probably the best way to phrase it. We have ambitions to build the portfolio overall and source new deals that will be accretive.

Greg Lewis

Analyst · BTIG. Please go ahead your line is open

So just in thinking about where we are in the cycle for the container shipping industry, there's a lot more activity -- there’s a lot more potential deals you’re looking at. So that in of itself just we’re not looking at real numbers, so we could actually see some deals. One other question I had is you still have the two bridge financings when -- realistically when could we see those bridge financings become permanent bank financing?

Harald Gurvin

CFO

I mean, if you look at the deals of course both we’ve executed very quickly. If you look at the four Evergreen vessels there we are well advanced in arranging a financing. So hopefully that will close within the third quarter that is the plan by end September.

Greg Lewis

Analyst · BTIG. Please go ahead your line is open

And then does the bridge financings limit your ability to go after transactions, i.e. do we need to get that financing in place before we can go after our next deal?

Harald Gurvin

CFO

Not really. I mean both -- if you look at these financings, we entered into the $320 million that are at term of more than one year. So you have time to finance it below we probably go through the financing their within the third quarter. The offer we received for the $200 million bridge facility that also has a term of more than one year but there we’ve also started discussions for long-term financing and I think that should be a very easy project to finance based on the counter part.

Ole Hjertaker

Management

And just adding to that, I mean the whole objective for us of using the bridge structure versus going straight for the long-term financing is exactly that we then will be able to execute more deals and also get the benefit of getting the cash flow earlier instead of waiting to put all pieces together. So I think this is the strength we have because of our relative size and financial flexibility. And on the last deal the banking question turned around and came up with this committed on very, very short basis, which is I would say almost unheard of in the banking market. Which of course is we’re very pleased to see that and I think is also hopefully demonstrates our standing within the banking community and our ability to source capital. In the end -- and the take out financing the reason why we didn’t do that in the first place is that our objective is to source financings that is very attractive on a long-term basis and what we are contemplating there takes a little longer to put together, and that's why we do it in this two-step approach.

Operator

Operator

And our next caller is Fotis Giannakoulis from Morgan Stanley. Please go ahead.

Fotis Giannakoulis

Analyst

I want to follow up again on the latest acquisition of the three containerships. If you can give us a little bit of color of how shall we think of the free cash flow after debt repayments and how shall we think of refinancing risk and the residual risk after the expiration of the charters?

Ole Hjertaker

Management

I can we give you guidance there. First of all, I would say these three container deals -- of course, it all depends on exact structure of the financing structure. But we do expect, I would say, from low mid teens on the terms of -- on the equity return to maybe high teens depending a little bit on final structure. So compared to the equity that was inject that is there as we see it quite attractive and very accretive. If you then look at the residual value, which of course always is unknown because it is forward in time and you don't know exactly what it is. We have always tried to take a very conservative approach to residual value assumption. So typically, we take a look at what we believe are mid-cycle replacement costs. We depreciate that down, I would say, from 20 to 25 years typically in our calculations to a conservative recycling value, and then we try to have a buffer also of that. And the reason for that is that as we all know, I mean over time you can build an infinite number of vessels. Every new vessel is on the margin more efficient than the previous vessel. And therefore, at the end of the charter period, we have to make sure that we have a structure where we have a reasonably comfortable breakeven level from that point. That also means that we -- usually we always build in significant debt repayments to ensure that the breakeven also on the financing is sufficiently low for the period thereafter. So this all goes together in what we call cocktail of creating hopefully an accretive deal, and we’ve now been in business for 14 years and what we say -- so far so good. We have been able to keep a quite high dividend payout over these years and been able to reinvest and also not be too exposed in down cycles in individual cycles.

Fotis Giannakoulis

Analyst

And can you also give us some information about the repayment profile of the loans that you signed about $50 million for the feeders. Is this down to zero during the life of the contracts? And also on the containership repayment profile -- and are there any maturities? I noticed some handysize vessels. Do you expect that these maturities will be refinanced in full or you will have to pay down the debt?

Harald Gurvin

CFO

If you look at the $50 million facility for the 15 vessels that annuity style repayment structure down to zero over the seven years to look in the cash flow over the charters. If you look at the container financing we’re looking at, I cannot comment on the repayment structure there yet that we can get back to once finalized, but the two bridge facilities we have entered into they are non-amortizing at least in the near term. So they will most likely be non-amortizing until we enter into the long term finance. If you look at near term maturities, there aren’t -- there’s nothing on the handysize vessels. We have some other facilities coming up for refinancing. We have -- I think you’re talking about the Supermax vessels, there we have -- one coming up in December 2018, $22 million that’s for two vessels. We are in discussions on the refinancing on that I cannot comment anything on the amount or anything. And then we also have a three vessel facility for supermaxes coming up in February ’19 where we will of course manage that in due course. But all these facilities and of course they have deep repayment structures, so it should be manageable. We also have the facility for the Frontline vessels coming up end of the year where as Ole mentioned the current outstanding of the three vessels first quarter end is around $85 million, which is basically in line with the recycling values of those vessels.

Fotis Giannakoulis

Analyst

One last question about the financing landscape, but I remember about a year ago there were a lot of Asian leasing houses, Chinese, Japanese companies. They were very keen in acquiring these containerships like the ones that you recently built. How does the competitive landscape look like right how, have this availability of capital or these competitors been less active that it gives more opportunities for additional transactions? If you can comment who else or how many other parties try to bid on this latest containership acquisitions or if it was a private deal that you negotiated yourself.

Ole Hjertaker

Management

Yes, to first commenting on the various providers of financing of capital. Yes, there has always been a number of companies providing capital to the maritime interstates, everything from. That could be German KGs, and if you go back 10 years, you have the U.S private equity money active for periods. You have seen the Chinese leasing companies building up substantially and of course also the Japanese, we have always been there but then basically or mainly related to Japanese built vessels. What we have seen over the years is that -- and from our side, we try to work with these various capital providers, because what we see is that they also look at the risk structures. And they see that working with us because of our size and position in the market can also be a benefit. So for instance we have a few vessels that have been financed in China with some of the providers of capital that you would see in the news. With regard to this specific transaction, this has been direct private deal with obviously one of our existing customers and therefore has not been flushed around in the market by brokers, whether or not they also have communicated with others on the vessels. Of course we don’t have any insight into that. But it’s important here to also understand that this is not a bareboat deal, this is not a financing structure. These are assets where we will operate the vessels. And of course there our position as a quality operator is important. We would never have been in a position to do this on the vessels we are running and operating -- are doing so at the highest standard with the top performance for our customers. So I think it’s -- maybe it’s a testament to our structure where we can operate vessels as basically best-in-class with the top liner companies in the world.

Operator

Operator

[Operator Instructions] We will now take our next question from Magnus Fyhr from Seaport Global. Please go ahead.

Magnus Fyhr

Analyst · Seaport Global. Please go ahead

Just one question on the cash position, I mean you’ve got about $160 million of cash. You got some asset sales of about $140 million. And then on top of that, you’ve got marketable securities over $100 million, that’s $400 million of liquidity to fund just one acquisition you have upcoming here. And on top of that, the acquisitions that you made there’s another $100 million of cash flow. What’s the comfort level here on the balance sheet, how much cash you need to keep on the balance sheet on an ongoing basis just to be flexible?

Ole Hjertaker

Management

Because most of our assets are on long term charters to high quality counterparties, there’s very significant visibility in the cash flows. Therefore, I would say with this portfolio, we are comfortable running the company with, I would say, $25 million to $50 million cash buffer. We have of course always on a week-by-week and one week, you may have an installment and then revenues might come in next week. So you need to have some buffer but you don’t need to have very huge buffer. So that 25 to 50 it should be more than sufficient to run this company on a cash flow basis. And so we do believe we still have good investment capacity in addition to the three vessels we announced earlier today.

Magnus Fyhr

Analyst · Seaport Global. Please go ahead

And you’ve been I mean very active here in the last three months. I mean do you still feel that there are equally as good opportunities still in the market?

Ole Hjertaker

Management

Well, we are screening for the new deal opportunities continuously and our objective is to continue building the portfolio, but we will not give specific guiding on volume that we’re going to do in the next quarter or two. Simply as I mentioned it’s a little earlier than -- it’s all about trying to do the right deals. So instead of guiding on volume, we report deals if we do a deal we do think make sense for us. And hopefully we can build the portfolio going forward with good projects.

Magnus Fyhr

Analyst · Seaport Global. Please go ahead

And just one last question on the cash flow statement, purchase of vessels $511 million. Was that just for the two acquisitions that closed during the second quarter, or is there anything else in there?

Harald Gurvin

CFO

That’s for those acquisitions.

Operator

Operator

It appears that there are no further questions at this time. I would like to turn the conference back to you for any additional or any closing remarks.

Ole Hjertaker

Management

We’d like to thank everyone for participating in our second quarter conference call. And if you do have any follow-up questions, there’re contact details in the press release where you can get in touch with us through the contact pages on our webpage, wwww.shipfinance.bm. Thank you.

Operator

Operator

That concludes today’s conference call. You may now disconnect.