SFL (NYSE:SFL) Q1 2020 Earnings Call

0:00 Is this correct? Press 1 for yes or press 2 for no. Please leave your name after the tone. Please leave your company name after the tone. Press 1 to listen to a recording or press 2 for playback instructions. Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2010 SFL Corporation Earnings Conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session, at which time, if you wish to ask a question, you will need to press Start 1 on the telephone keypad. I also must advise that this conference is being recorded today, and I will end the conference over to your speaker today, Ole Bjarte Hjertaker, thank you, please go ahead.

0:59 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 for 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 in the forward-looking statements.

1:50 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 report 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 of directors The announced dividend of 25% represented a dividend of 20% based on closing price yesterday, and this is our 65th quarter with dividends.

2:42 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.

3:32 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.

4:22 We have been active in the financing market over the last two 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 the 2002-built VLCC Front Hakata, which was the last vessel remaining from the initial fleet of 47 vessels acquired from Frontland in 2004. Net proceeds was approximately $30 million with neutral book effect. We now only have two surfeited VLCCs remaining on charters to a subsidiary front line, and the profit share in the first quarter was $5.9 million.

5:17 Front line has sub-chartered the vessels, most of which are profit share contributions, each of the next two to three quarters as well. and we have 1.4 million frontal shares remaining, so the announced cash dividend of 70 cents per share is adding another million dollar 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 5-6% 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.

6:12 And finally, today we announced the acquisition of a new build VLTC 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 VLTC resales, effectively providing us with a very attractive risk profile. Our chartering counterparty, the Landbridge Group, has secured a three-year sub-charter to an oil manager, providing good cash flow visibility from the asset. And there will be purchase options for the charterer during the charter period, first time after three years. SFL will fund the acquisition with a $50 million non-recourse debt facility at very attractive terms, and that contribution after debt service interest and installments during the first three years is estimated to more than $4 million per year on average.

7:12 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 the goal of ensuring the health and safety of our crew on board the vessels and on shore 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 all crewing managers in all our segments to discuss and handle any issues, in particular challenging facing your crew and safe operations as they may arise.

8:01 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 book market has been impacted due to the sudden reduction in demand for transportation services, impacting earnings in the quarter. With revised expectations for world trade coming down for the remainder of the year at least, we estimate the net impact on SFL of approximately 2 cents 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 re-delivered 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.

8:59 In case all these four vessels have to be laid up in a worst-case scenario, the net impact for SFL is estimated to approximately 2 cents per share per quarter, to compare to pre-corona performance from these vessels. The card barriers 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 results 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 and markets in order to be able to react quickly to any potential business disruption.

10:03 At the same time, we also look for new business opportunities, as illustrated by the acquisition announced earlier today. Following 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 evolved 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, The container being the largest segment right now with more than 50% of the backlog.

10:58 We do not have a set mix in the portfolio, focuses 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 investments and not just invest because money is burning in our pockets. Our strategy has also been to maintain a strong technical and commercial operational platform in cooperation with our assistant companies in the Sea Tankers 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 other companies with a financial profile in the maritime world, 65% of our cash flow comes from vessels on time charter and only 35% from beer boat charter vessels.

11:58 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 top co, you could call it, guarantees all debt in all subsidiaries, we have 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 SFM.

12:44 Some are single asset and some are for several similar vessels. We call this or 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 where we have very low risk, like financing below recycling value assets, or where there are other features giving us a cool 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 Seedrill in 2017, where we believe we were able to negotiate a 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.

13:54 Over asset level financing, only around 60% is guaranteed by our parent company, SFL Corporation, and we also have five vessels without any financing attached. There has been some questions relating to the 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 is now down to around 25% of our charter backlog, and we now only own three rigs after divesting five offshore support vessels. The charter hire from the drilling rigs were $26 million in the first quarter. Two of the rigs are harsh environment units working in the North Sea, with Vestlina subchartered to ConocoPhillips until the end of 2028, and West Hercules is sub-chartered to Equinor until next year. The third rig, West Taurus, is EAT idle and laid up in Norway.

14:54 Cedral is paying their agreed charter hire on all three rigs and we continue to reduce the debt on the rigs as per schedule. Given the high attention to the offshore segment currently, I would like to highlight the significant delivering that has happened the last three years as illustrated on this slide where we compare what we call the pre-Chapter 11 procedural levels on the financing and what it looks like at the end of March this year. We have reduced debt related 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, RIG's after-debt service.

15:43 Importantly, the contribution is individual per RIG, and the idle RIG vestaurus only represent $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 their 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 Towers. But for now, Seadrill keeps paying the higher-run schedule, and they had more than a billion dollars in cash at the end of the last quarter.

16:33 And that 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.

16:49 Thank you, Mr. Hjertaker. On this slide, you've seen a pro-formal illustration of cash flows for 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, and also a net of extraordinary and non-cash items. The company generated gross charter hire for approximately $161 million in the first quarter, with close to 90% of the revenue coming from our fixed start rate, which currently stands at $3.6 billion, which provides us with strong visibility on our cash flow going forward. The line of fleet generated plus charter hire of approximately 78 million. This amount, approximately 96%, was derived from our vessels on long-term charters.

17:39 At the end of the quarter, SFL's line of fleet backlog was approximately 1.9 billion, with an average remaining charter term of 5 years or 8 years awaited by charter revenue. Approximately 84% of the liner backlog is to the world's largest liner operators, Maersk Line and MSC. During the quarter, SFL extended the charter party for three 10,000 Tu-class container vessels until April, July and November 2024, respectively. Subsequent to quarter end, we also extended the charters for seven 4,000 Tu-class container vessels with MSC, until the third quarter of 2025.

18:24 So in aggregate, these extensions added 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 or void chartered vessels, and 16% provided from bearable charters. It has also been a firm quarter for ASUS MAX 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.

19:14 During the quarter, SFL sold the 2002-built UCC Frontacata and terminated the charter agreement for the vessel. Net proceeds to the company was approximately $20,000, and the book effect was neutral. Subsequently, at the quarter end, two of our two UCCs on the charter front line 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 $50,000 per day per vessel, has been 50-50 between frontline and DFL.

20:00 And as announced previously today, the company has agreed to acquire the 2020 built VCC Landbridge Wisdom against a seven-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 cost for three first years of below 3%. During the fourth quarter, our drive-off 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 non-cash impairment chart of approximately 80% in the first quarter, as they estimated future cash flows for each of these vessels did not exceed their book value.

20:56 With limited long-term charter opportunities for these vessels, the company will look at opportunities to develop At the latest stage, market conditions are right as part of our continued fleet optimization process. At the end of the first quarter, SFL owns three drilling rigs with long-term charters to fully go to the affiliates of Sealwheel. The rigs generated approximately 26 billion in charter hire. The Harsen Weim and Jackerbrigg Vestinus is sub-chartered to ConocoPhillips until the end of 2028. while the harsh environment semi-submersible rig Vest Hercules is employed in consecutive shorter-term subcharters to Equinor in the North Sea.

21:41 The semi-submersible rig Vest Herules is currently in lay-up in Norway. During the quarter, SFL agreed to terminate the charter agreements for five offshore support vessels with Solstad. Four vessels were sold and delivered to unrelated third parties in the first quarter. One 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 an adjusted EBITDA of approximately $170 million for the first quarter, or $1.11 per share. We then move on to the profit and loss statement as reported on the US GAAP.

22:40 As we have described in previous principles, our accounting statements are different from those of a traditional shipping company, as our business strategy focuses on long-term contracts. A large part of our activities are classified as capital leasing. As a result, a significant portion of our chart revenues are excluded from US 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 US GAAP of approximately 122 million, which is a lower number than the 161 million of charter hire actually received for the above-mentioned reasons.

23:31 In the quarter, the company recorded profit split income of 5.9 million from our tank vessels on charter to frontline, and 500,000 from fuel cost savings from scrubbers. And as previously mentioned, the company recorded non-cash impairment charges of approximately 80 million, related to seven hand-decided vessels. Due to the extreme market volatility towards the end of the quarter, the company recorded 13.6 million unrealized costs on its marketable securities investments, and 23.4 million non-cash costs relating to hedging derivatives, including interest stocks and currency hedges. So overall, and according to US GAAP, the company reported a net loss of $87 million, including $104 million in non-cash losses, or $0.81 per share.

24:24 Moving on to the balance sheet, it had 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 ends, the company reduced its shareholding in front line 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 front-end shares, 108 million of senior bank financing on the source for SFL-secured time-shortened extensions as attractive terms, as well as the 2020 NOC senior unsecured bond maturing in June, which we effectively refinanced in January by the issuance of the new NOC bond in the Norwegian market.

25:28 So based on the Q1 figures, the company has a book-exit ratio of approximately 25%. We're moving on to an update on liquidity and capex. At quarter end, we have approximately $217 million in cash on the balance sheet, including cash held in wholly-owned non-for-related subsidiaries. In addition, the company has marketable securities of 34 million net market prices at the end of the quarter. This includes a shared design and ID of crude carriers, as well as financial investments in secured bonds and other securities. Our capex is limited, and we expect an investment in the LandBridge ECC, which will have a net contribution of more than $4 million on average per year.

26:21 The remaining capex is primarily related to scrub installations on our 10,000-year-class vessels on long-term charters to Maersk. Over the years, we have continuously expanded and diversified our lending group, which currently consists of approximately 13 international banks. We are a growing number from Asia over the last few years. And while many companies in the maritime space find it challenging to secure credit, SFL has This is evidenced by the recent financings we have secured in a turbulent market environment, which includes a non-recorded financing of $50 million for the acquisition of the launch system, with a nolling cost of less than 3%, including LIBOR, as well as $25 million for a sound S container that It has a rolling cost of approximately 1.9%, including LIBOR, for a five-year period.

27:27 In the current environment, it is a competitive advantage. Then to summarize. The Board has declared a cash dividend of 25 cents 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, turned to shareholders through dividends. The model continues to grow to $6.6 billion, We have also upsided from profit split arrangements for mobile CCs and cave-sized vessels, in addition to profit split arrangements related to fuel savings on some of our large container vessels.

28:28 Despite our relatively volatile market in 2020, we have already added approximately 230 million to our fixed chart rate backlog, and we continue to explore new business opportunities. And while risk premiums on energy and shipping investments have increased, 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 strengthening both balance sheet and investment capacity.

29:13 SFL's business model has been continuously tested through its 16th 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. Yes, sir. Thank you, ladies and gentlemen. We will now begin the question and answer session. And if you wish to ask a question, please press star and 1 on the telephone keypad, and wait for your name to be announced. Once again, star and 1 if you wish to ask a question. And we have questions that came through, sir. We will now take our first question. And this comes from the line of Randy Givens. Your line is now open. Please go ahead and ask your question.

30:03 Howdy, gentlemen. How's it going?

30:06 Very well, thank you. And yourself?

30:09 All right. Doing well, doing well. So yeah, first looking at the newly announced VLCC acquisition, you know, 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 would 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, you know, regardless of asset class?

30:45 Thanks. Well, I would say we are deal and segment agnostics. You know, we look at time trailer deals, we look at bare-butt deals, and we could even look at financing structures for that matter. It's all about, you know, 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, you know, 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, you know, and did quite some work on deals aggregating around more than $20 billion. But we ended up just doing very few of those.

31:30 You know, coincidence. You can say 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 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.

32:06 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 have there been any conversations around possible charter reductions and extensions?

32:27 Well, if you look at our charter portfolio, I believe 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. 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 winners because they have a bigger and better infrastructure around it.

33:21 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 recorded first quarter numbers. Going forward or through the rest of the year, I believe most expect effective liftings of boxes to come down. But again, it's planned, and one of the mitigating factors for the liner 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.

34:20 So there are some balancing factors. But obviously, you know, container market is a reflection of world trade. So in the long run, of course, you need world trade to recover and get back on the feet. But I think the smaller operator, more marginal operators will be more André Reppen, Thanks so much.

35:18 So what we have done, obviously, you know, so it hasn't been a topic for discussion, you know, what we have done, you know, call it in the past, you know, during call it, you know, call it market volatility, if you go back to the financial crisis, you know, 10 to 12 years ago. What we did then, in some few instances, we sometimes, if you have reduced your charter rate, you get it back in effective interest later. 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 they're willing to take in the space.

36:03 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 with André Reppen, Mikkel Storm

37:02 Thank you. Thank you. And we will now take our next question, and this comes from the line at Greg Willis. Your line is now open. Please go ahead.

37:15 Yes, thank you again, Mr. Goon.

37:17 Hi, Greg.

37:20 Ole, could you talk a little bit about, you know, not only the decision to reduce the dividend, How did we come up with that number? I seem to remember the last time you were last time procedural enterday 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, you know, now we're at a 10% yield. Just kind of wondering any color around, you know, why $0.25, why not $0.20, like just kind of how you're thinking about that in terms of, you know, that as it goes forward or on the way.

38:09 Yeah, absolutely. Of course, you know, adjusting the dividend down is a difficult decision. And, you know, I can tell you it was a long discussion, you know, on it, you know, with the board. If you look at it, and it wasn't, I can tell you, it was not 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 three rigs to Cedro, you know, the one idle rig, which I could argue potentially because it's idle, you know, could be more explosive. is prohibiting $0.02 per share. So if you say, okay, $0.02 per share there, as I mentioned earlier, because the tribal market and the expectations for the tribal 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 tribal vessels, that in aggregate is around $0.02 per share.

39:24 In case the two car carriers and the two sort of the 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 layup as a worst case scenario, you know, that could be another two cents. So it's sort of a, and also I think, you know, with the fuel price spread coming down, Also, the risk will be, at least in the near term, lower contribution from the profit split on some of the container chips compared to what we saw earlier in the first quarter, maybe another one to two cents. So, that is for the reasoning. What has really changed in the business model? What's changed in the near-term outlook? And then, of course, you know, making sure that, you know, SFL is a really robust entity, that we have investment capacity.

40:20 And right now, I think, you know, having capacity to invest like we just did is a real strength because, as 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 could say, you know, could you cut it to 20? You know, you could cut it to 10. You could cut it to zero. But in the end, you know, we have an underlying, you know, 90% of the cash flow from long-term charters. Our underlying cash flow has not so far, you know, in the first quarter been materially affected. It's just been the spot traded vessels, which is such a small proportion anyway, and everything else is going as clockwork.

41:07 So we believe that Tencent is appropriate. It's factoring in several potential quality events and hopefully also ensuring that we have a very robust balance sheet and good investment capacity. It was a long answer, but I think it's certainly a lot more than just looking at what the share price is going to be and sort of navigating after that.

41:37 Okay, perfect. And then just, I mean, clearly, you know, that decision, a little bit more cash inside the company, you know, clearly these are, you know, here unprecedented 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 12 months to potentially deploy a fair amount of capital at attractive types André Reppen, Mikkel Storm Weum, Aksel Olesen, Thecla Panagides More opportunities, all of the uncertainty, is the market really moving forward?

42:48 You know, we kind of need to see where the dust settles out before we could see one-off tax reveals and transactions, but in terms of kind of larger Are those kind of been put on hold as a result of all this?

43:10 I think if you look at the market generally, as the deal took hold, it was like a bit of a backdoor for the deal. I think everybody, you know, almost froze to death. We see more deal flow now after a couple of weeks than we would be so 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 we're happy to deploy you. Thank you. Thank you, and we'll now take our next question, and it's coming from the line of Liam Burke.

44:13 Your line is now open. Please go ahead.

44:21 The VCC purchase was at a fairly healthy discount to what Thecla Panagides Thecla Panagides Thecla Panagides

44:55 For consideration that the vessel has a three-year charter to an oil major for the three first years, so for us we get a good entry point as well as a very good stability on the cash flow for the first three years, taking down quality residual significantly. And with the attractive financing we have secured on the back of it, it's a very good investment for SFL. Yes, it was.

45:23 And on the asset, you managed your portfolio, you're asset agnostic. We talked about some opportunities on the acquisition side. What about on the divestiture side on the asset? So there, is it you see opportunities to sell at attractive prices?

45:43 I would say right now... I think there will be only opportunistic buyers there, so I think divesting in the portfolio right now is probably not the best time. We are looking at, you know, we have the seven small handy-sized bulkers in a fleet. We don't really see any real long-term charging opportunities around those, so over time, you know, 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 try to manage it, you know, to optimize value, obviously. So whether we sell them, you know, later, you know, this quarter or later this year or late next year, you know, that's all down to what we think we can get for them. Yeah.

46:35 I mean, a good example is that we sold the front avocado, which was the last... The legacy vessel from the original SSL fleet back in February at 30 million, and that was an 18-year-old vessel. At now, two months later, acquiring a brand new VCC scrubber fitted for 65. So that's what we like to look at and take an exit on older and acquiring new ones in a good time of the cycle.

47:13 Thank you. Thank you very much. Thank you. And we'll now take our next question and discuss from the line of Chris. Your line is now open. Please go ahead.

47:28 Thanks for the question. I wanted to come back to the dividend just for a moment to make sure I sort of understand some of the comments around it. It sounds like there's about 7 cents of cash risk around the offshore, the rigs. You also talked about 2 cents 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? How do you feel about the sustainability of 25 cents in the context of those collectively?

48:12 Yes, so when I discussed that, it was really more to sort of give some perspective on some of the reasoning, put it with the board, on the dividend capacity and, of course, the very difficult decision to actually, you know, reduce the dividend that is virtually unaffected in the first quarter. So it's a combination of that. It's seven in aggregate, but there are three individual rate structures. And you can see in a scenario where... So there is some flexibility around that. Same thing, you know, on the other effects, you know, I totally agree.

49:02 Hopefully it's short-term, and hopefully it will pop back. But at least now there is more uncertainty, and in more uncertain times, we think we'll give better long-term shareholder value than necessarily closing horizon and paying out like we did last quarter.

49:33 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 three specific rigs, can you give us some of the potential scenarios that you might see as that process kind of plays out or just kind of 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.

50:03 Absolutely. I mean, you know, and there, you know, just want to highlight, you know, the fact that, you know, two 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 could say many scenarios and, you know, you can have your opinion on Seadrill and Seadrill's financial strength, but we know that this is a very good performing rig. and of course, you know, they are obligated to pay the charter hire. They're 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.

50:53 So Equinor just extended the charter on that one in the midst of the, call it the COVID-19, you know, call it market here. So, again, you know, in a setting where we think that that will be a robust asset also going forward. But, importantly, as we also tried to illustrate in the presentation, what's happened since the last time Cedral were in trouble, so to speak, and, you know, at the end of 2016, it became clear to everyone in the market that they had to go through a restructuring process. We have delevered those assets more than 30%, and we have reduced our exposure along with that in the meantime.

51:44 And if something should happen, say it was a complete meltdown, and there was nothing left there, and we took the assets back, Thank you very much. Thank you very much. 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 we can maybe negotiate mutually sensible terms because we hopefully can manage it differently than a bank. But of course the base case here It comes through this near-term soft market that they continue to pay the charter rate as they should, or maybe for one or some of the idle rates, maybe with some delayed charter payments potentially.

53:12 But in the long run, they should come back. They're one of the market leaders, particularly on the harsh environment side, and also Jacob's. So I don't think it's pitch dark, and they have more than a billion dollars in debt at the end of last quarter. In cash? In cash, yeah.

53:28 In cash, okay. Okay, no, I appreciate that. That's great color. Thank you for that. And then I guess the last question would just be, How do you think maybe about your optimal sort of leverage as you negotiate or sort of navigate through this challenging period in 2020? I don't know if there's need to be cash available for deleveraging this year or how you kind of think about that, but can 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? Yeah, thanks. Our philosophy is always to be long-term, and with that goes a constant leveraging on all the acquisitions that we do. Of course, we've had some declaration that's come down somewhat over the last few quarters, so obviously it's focused to have robustness and a good buffer on that.

54:20 So it's obviously focused to strengthen the talent Thank you. Thank you. No further questions that came through, sir. You may continue.

55:05 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 on shore for their tremendous effort in a very challenging time and committed to continue building the business. If you have any follow-up questions, there are comments in the press release or you can get in touch with us through the contact pages on our webpage www.sflcorp.com. Thank you. Thank you. That concludes our conference for today. Thank you all for participating in our disconnect.

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