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…

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…

[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…

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…

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.